Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
|
| | |
(Mark One) |
x | | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| | For the fiscal year ended February 3, 2018 |
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) |
Registrant's telephone number, including area code: (614) 474-4001
Securities registered pursuant to Section 12(b) of the Act:
|
| | |
| | |
Title of Each Class | | Name of Each Exchange on Which Registered |
| | |
Common Stock, $0.01 Par Value | | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
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. (Check one):
|
| | | | |
Large accelerated filer | o | | Accelerated filer | x |
| | | | |
Non-accelerated filer | o | (Do not check if a smaller reporting company) | Smaller reporting company | o |
| | | Emerging growth company | o |
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. Yes o No x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x
Aggregate market value of the registrant's common stock held by non-affiliates of the registrant as of July 29, 2017: $472,627,020.
The number of outstanding shares of the registrant's common stock was 75,596,549 as of March 16, 2018.
DOCUMENT INCORPORATED BY REFERENCE:
Portions of the registrant's definitive proxy statement for its Annual Meeting of Stockholders, to be held on June 13, 2018, are incorporated by reference into Part III of this Annual Report on Form 10-K.
|
| | | | |
| | Table Of Contents |
Part I | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
Part II | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
Part III | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
Part IV | | | |
| | | | |
| | | | |
| | | |
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements that are subject to risks and uncertainties. All statements other than statements of historical fact included in this Annual 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,” “continue to,” and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events. For example, all statements we make relating to our estimated and projected costs, expenditures, cash flows, and financial results; our plans, objectives, strategies, and initiatives for future operations or growth; the expected outcome of such plans, objectives, strategies, and initiatives; or 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, but not limited to those under the heading "Risk Factors" in Part I, Item 1A in this Annual Report on Form 10-K. Those factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements included in this Annual Report on Form 10-K. We caution you not to place undue reliance on these forward-looking statements. We do not undertake any obligation to make any revisions to these forward-looking statements to reflect events or circumstances after the date of this Annual Report on Form 10-K or to reflect the occurrence of unanticipated events, except as required by law, including the securities laws of the United States and rules and regulations of the Securities and Exchange Commission ("SEC").
PART I
ITEM 1. BUSINESS.
In this section, "Express", "we", "us", "the Company", and "our" refer to Express, Inc. and its consolidated subsidiaries as a combined entity. Our 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. All references herein to "2017", "2016", and "2015" refer to the 53-week period ended February 3, 2018, and the 52-week periods ended January 28, 2017 and January 30, 2016, respectively.
General
Express is a specialty retailer offering both women's and men's apparel and accessories. We have over 35 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 aspects of their lifestyles, including work, casual, jeanswear, and going-out occasions.
As of February 3, 2018, we operated 635 stores across the United States and in Puerto Rico, including 145 factory outlet stores. Our stores are located primarily in high-traffic shopping malls, lifestyle centers, outlet centers, and street locations, and average approximately 8,500 gross square feet. We also sell our products through our e-commerce website, www.express.com, and our mobile app, and have franchise agreements with franchisees who operate Express locations in Latin America. Our 2017 merchandise sales were comprised of approximately 62% women's merchandise and approximately 38% men's merchandise.
We report one segment, which includes the operation of our brick-and-mortar retail and outlet stores, e-commerce operations, and franchise operations. Additional information about our reportable segment can be found in Note 2 of our Consolidated Financial Statements included elsewhere in this Annual Report of Form 10-K.
Competition and Competitive Strengths
The apparel retail market is highly competitive. We compete with other brick-and-mortar and e-commerce retailers that engage in the retail sale of women's and men's apparel, accessories, and similar merchandise. We compete on the basis of a combination of factors, including, among others, style, breadth, quality, and price of merchandise offered, in-store and online customer experience, and brand image.
We believe we differentiate ourselves from our competitors as follows:
Established Lifestyle Brand. With over 35 years of heritage, the Express brand represents a distinctive fashion point of view that is confident, sexy, and vibrant. We believe that our customers view Express as a fashion authority and look to us to provide them with the latest fashions that meet their multifaceted lifestyles and allow them to express their individual styles. The Express brand differentiates itself by offering (1) a balanced assortment of core styles and the latest fashions; (2) products that address fashion needs across multiple wearing occasions, including work, casual, jeanswear, and going-out; and (3) quality products at an attractive value.
Data Driven Processes. Our data driven processes allow us to test approximately three-quarters of our merchandise in select stores and online before placing orders for our broader store base. In addition, we assess sales data on a weekly basis in order to make in-season inventory adjustments where possible, which allows us to respond to the latest trends. We have an efficient, diversified, and flexible supply chain, including a network of buying agents and third-party manufacturers located throughout the world, that allows us to quickly identify and respond to trends and bring a tested assortment of high quality products at competitive prices to our stores.
Strong and Tenured Team. Our leadership team has extensive experience in the specialty retail apparel business, including in the areas of fashion design and merchandising, supply chain, marketing, customer experience, e-commerce, store operations, technology, planning and allocation, and real estate, as well as other diverse business experiences that we believe are valuable to us as we continue to execute our growth strategy. Experience and tenure with Express extends deep into our organization, including district and store managers.
Our future success will depend on our ability to maintain these strengths, offer compelling merchandise at an attractive value, provide an exceptional omni-channel customer experience, maintain the strength and increase awareness of the Express brand, and retain and acquire new customers.
Our Products
The majority of our apparel designs are created by our in-house design team, and we believe we have developed a portfolio of apparel products that have significant brand value, including the Editor pant and 1MX shirt. We focus on providing our customers with attractively-priced merchandise that is well-constructed and made from quality materials that are designed to last for several seasons, and believe our customers value our consistent fits and detailing.
We plan our product assortments and display them in our stores and online in a coordinated manner to encourage our customers to purchase multi-item outfits as opposed to individual items. We believe this allows us to better meet our customers' shopping objectives while differentiating our product offerings from competitors. On average, our customers purchase two to three items per transaction. We monitor cross-selling trends in order to optimize our in-store and online product assortment.
Omni-Channel Customer Experience
We are committed to creating an omni-channel customer experience that offers a seamless shopping experience whether the customer is shopping in a store or online through a desktop, tablet, or mobile device. We believe the lines between our store and e-commerce channels are disappearing as customers increasingly interact with us both in-store and online and often through mobile devices while in stores. As a result, we are focused on leveraging the best of both channels to create an exceptional omni-channel shopping experience.
We design our stores to create a distinctive and engaging shopping environment and project our image of Express as a fashion authority for our target demographic. Our stores feature a vibrant and youthful look, bright signage, and popular music. Our stores are constructed and finished to allow us to efficiently shift merchandise displays throughout the year as seasons dictate. To further enhance our customers' experience, we seek to attract enthusiastic store associates who are committed to offering a high level of customer service. We believe our managers and associates deliver a superior shopping experience as a result of the training we provide, the culture of accountability we foster, the incentives we offer, and the decision-making authority we grant to store managers. On average, our store managers have been with Express for over five years.
Similar to our stores, our e-commerce capabilities focus on creating an engaging and easy shopping experience that supports a vibrant, young fashion consumer, whether on a mobile device, tablet, or at a desktop, with a particular focus on mobile. We recognize the growing preference for online shopping and continue to make enhancements to the online customer experience through improved search, site navigation, and checkout capabilities, and targeted customer messaging, making shopping easier for customers.
In 2017, we expanded our omni-channel capabilities with the launch of ship from store in 200 stores. Ship from store allows us to ship merchandise from select stores directly to the customer. In addition, we piloted "buy online pickup in store" which allows customers to order online and pick up at certain Express stores. We believe that these new and expanded capabilities will enhance the overall customer experience and have a positive impact on our overall business, including sales, margins, and inventory productivity.
Marketing
We use a variety of marketing vehicles designed to acquire new customers, engage with existing customers, increase customer traffic in-store and online, and build brand loyalty. These include direct mail, e-mail communications, promotional offers, social media, print, television, and digital advertising, celebrity brand ambassador campaigns, arrangements with social influencers and bloggers, in-store visuals, earned media mentions, and other features through public relations activities.
We use a proprietary customer database, together with data analytics, to customize our communications and make targeted offers to customers in an effort to increase customer traffic in-store and online and to increase conversion. In addition, we offer a customer loyalty program, Express NEXT, which allows customers to earn rewards for purchases and offers other incentives to engage with the Express brand. We also offer a private-label credit card through an agreement with Comenity Bank (“Comenity”) under which Comenity owns the credit card accounts and Alliance Data Systems Corporation provides services to our private-label credit card customers. All of our proprietary credit cards carry the Express logo. We believe that our loyalty and credit card programs encourage frequent store and website visits, promote multiple-item purchases, and cultivate customer loyalty to the Express brand.
Technology
We rely on information technology to operate our business. Our information technology provides a full range of business process support and information to our store, e-commerce, merchandising, financial, and real estate teams. We utilize a combination of customized and industry standard software systems to provide various functions related to point-of-sale, inventory management, design, planning and allocation, and financial reporting. In 2016, we launched multiple systems upgrades, including a new order management system, a new retail management system, and a new enterprise planning system to further enhance our omni-channel capabilities. With the completion of these systems upgrades, we have modernized approximately 95% of our systems. We believe these new systems will allow us to increase speed-to-market, conduct planning and allocation with more precision, and ultimately give us the ability to maximize inventory productivity and reduce markdowns over time.
Sourcing
Our Sourcing Methods
We utilize a broad base of manufacturers located throughout the world that we believe produce goods at the level of quality that our customers desire and can supply products to us on a timely basis at competitive prices. We do not own or operate any manufacturing facilities and, as a result, contract with third-party vendors for the production of all of our merchandise. We purchase both apparel and accessories through buying agents and directly from vendors. In exchange for a commission, our buying agents identify suitable vendors and coordinate our purchasing requirements with vendors by placing orders for merchandise on our behalf, ensuring the timely delivery of goods to us, obtaining samples of merchandise produced in factories, inspecting finished merchandise, and carrying out vendor compliance monitoring and administrative communications on our behalf.
We purchase the majority of our merchandise outside of the United States through arrangements with approximately 95 vendors utilizing approximately 375 manufacturing facilities located in approximately 20 countries throughout the world, primarily in Asia. The top five countries from which we sourced our merchandise in 2017 were Vietnam, China, Indonesia, the Philippines, and Sri Lanka, based on total cost of merchandise purchased. The top 10 manufacturing facilities, based on cost, supplied approximately 25% of our merchandise in 2017. We purchase merchandise using purchase orders, and therefore are not subject to long-term production contracts with any vendors, manufacturers, or buying agents.
Quality Assurance and Compliance Monitoring
Each supplier, factory, and subcontractor that manufactures our merchandise is required to adhere to our Code of Vendor Conduct and certain other purchasing terms and conditions, including those related to product quality. This is designed to ensure that each of our suppliers' operations are conducted in a legal, ethical, and responsible manner. Our Code of Vendor Conduct requires that each of our suppliers provides minimum wages and benefits, limits working hours, complies with all laws, including environmental laws, and provides a safe and healthy work environment. It also forbids the use of child labor or forced labor and prohibits unauthorized subcontracting. We monitor compliance through third parties who conduct regular factory audits on our behalf as well as through our buying agents.
Distribution
We utilize two facilities for the distribution of our product, both of which are owned and operated by third parties. Virtually all of the merchandise sold in our stores and on our website is first received and processed at a central distribution facility in Columbus, Ohio. From there, merchandise allocated to be sold in stores is shipped to our stores and merchandise to be sold online direct-to-consumer is shipped to a distribution facility in Richwood, Kentucky (the "Richwood Facility"). Merchandise is typically shipped to such stores and to the Richwood Facility via third-party delivery services multiple times per week, providing them with a steady flow of inventory. The third party who operates the Richwood Facility is responsible for fulfilling the majority of the orders placed through our website and shipping merchandise directly to customers via third-party delivery services, however in 2017 we began to ship select online orders from 200 retail stores. In addition, we piloted buy online pick up in stores in 2017, which allows our customers to make purchases through our website and then pick up their merchandise in certain retail stores. We intend to expand these capabilities in 2018.
Stores
As of February 3, 2018, we operated a total of 635 stores in 47 states across the United States, as well as in Puerto Rico.
The following list shows the number of stores we operated in the United States and Puerto Rico as of February 3, 2018: |
| | | | | | | | | | |
Location | Count | | Location | Count | | Location | Count |
Alabama | 5 |
| | Louisiana | 7 |
| | Ohio | 19 |
|
Arizona | 10 |
| | Maine | 3 |
| | Oklahoma | 5 |
|
Arkansas | 3 |
| | Maryland | 13 |
| | Oregon | 5 |
|
California | 80 |
| | Massachusetts | 18 |
| | Pennsylvania | 29 |
|
Colorado | 10 |
| | Michigan | 21 |
| | Puerto Rico | 4 |
|
Connecticut | 11 |
| | Minnesota | 15 |
| | Rhode Island | 3 |
|
Delaware | 2 |
| | Mississippi | 1 |
| | South Carolina | 7 |
|
Florida | 51 |
| | Missouri | 11 |
| | South Dakota | 1 |
|
Georgia | 18 |
| | Nebraska | 4 |
| | Tennessee | 8 |
|
Hawaii | 2 |
| | Nevada | 9 |
| | Texas | 57 |
|
Idaho | 1 |
| | New Hampshire | 5 |
| | Utah | 6 |
|
Illinois | 32 |
| | New Jersey | 23 |
| | Vermont | 1 |
|
Indiana | 13 |
| | New Mexico | 3 |
| | Virginia | 16 |
|
Iowa | 9 |
| | New York | 45 |
| | Washington | 9 |
|
Kansas | 4 |
| | North Carolina | 16 |
| | West Virginia | 1 |
|
Kentucky | 6 |
| | North Dakota | 1 |
| | Wisconsin | 12 |
|
| | | | | | Total | 635 |
|
The following list shows the number of stores operated by our franchisees by country as of February 3, 2018:
|
| | |
Location | Count |
Mexico | 11 |
|
Costa Rica | 2 |
|
Panama | 2 |
|
El Salvador | 1 |
|
Guatemala | 1 |
|
Total | 17 |
|
Intellectual Property
The Express trademark and certain variations thereon, such as Express World Brand, are registered or are subject to pending trademark applications with the United States Patent and Trademark Office and/or with the registries of many foreign countries. In addition, we own domain names for many of our trademarks, including express.com. We believe our material trademarks have significant value, and we vigorously protect them against infringement.
Regulation and Legislation
We are subject to labor and employment laws and regulations, including minimum wage requirements, intellectual property laws, consumer protection laws and regulations, including those governing advertising and promotions, privacy, and product safety, and laws and regulations with respect to the operation of our stores and business generally, including the Foreign Corrupt Practices Act and as a result of being a public company. In addition, we are subject to United States customs laws and similar laws of other countries associated with the import and export of merchandise.
Employees
We currently employ approximately 16,000 employees. Approximately 900 employees are based at our home office locations in either Columbus or New York City, approximately 60 are field-based regional and district managers, approximately 1,600 are in-store managers or co-managers, and approximately 13,400 are in-store sales associates. Approximately 20% and 80% of our associates are full-time and part-time, respectively. None of our employees are represented by a union, and we have had no labor-related work stoppages. We believe our relations with our employees are good.
Seasonality
Our business is seasonal. We define our seasons as Spring (first and second quarters) and Fall (third and fourth quarters). Historically, we have realized a higher portion of our net sales and net income in the Fall season due primarily to the impact of the holiday season. In 2017, approximately 56% of our net sales were generated in the Fall season, while approximately 44% were generated in the Spring season. Cash needs are typically higher in the third quarter due to inventory-related working capital requirements for early Fall and holiday selling periods. Our business is also subject, at certain times, to calendar shifts, which may occur during key selling periods close to holidays such as Easter, Thanksgiving, and Christmas.
Corporate History
We opened our first store in 1980, in Chicago, Illinois as a division of The Limited, Inc. (now known as L Brands, Inc.), and launched our men’s apparel line in 1987, which was rebranded under the name Structure in 1989. In 2001, we began to consolidate our separate women’s and men’s stores into combined dual-gender stores under the Express brand. In 2007, Golden Gate Capital acquired 75% of the equity interests in our business from an affiliate of Limited Brands, Inc. and we began to operate as a standalone company. In May 2010, the Company converted to a Delaware corporation, held an initial public offering, and listed its shares on the New York Stock Exchange. Subsequent to our initial public offering, Golden Gate Capital and Limited Brands, Inc. sold their remaining interests in the Company and are no longer affiliated with Express.
Available Information
We make available, free of charge, on our website, www.express.com, copies of our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act of 1934"), as soon as reasonably practicable after filing such material electronically with, or otherwise furnishing it to, the SEC. The SEC maintains a website that contains electronic filings at www.sec.gov. In addition, the public may read and copy any materials we file with the SEC at the SEC's Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-732-0330. References to our website address do not constitute incorporation by reference of the information contained on the website, and such information is not part of this Annual Report on Form 10-K.
ITEM 1A. RISK FACTORS.
Our business faces a number of risks. The risks described below are the items of most concern to us, however these are not all of the risks we face. Additional risks and uncertainties not presently known to us, that apply to similar businesses more generally, or that we currently consider immaterial may also impair our business operations.
RISK FACTORS
External Risk Factors
Our business is sensitive to consumer spending and general economic conditions. Recessionary, slow growth, or other difficult economic conditions could adversely affect our financial performance.
Consumer purchases of discretionary items, including our merchandise, generally decline during recessionary periods and other periods where disposable income is adversely affected. Our business is impacted by factors that affect domestic and worldwide economic conditions and disposable income, particularly those that affect our target demographic, including unemployment levels, levels of consumer debt, availability of consumer credit, levels of student debt, healthcare costs, reductions in net worth, residential real estate and mortgage markets, taxation, fuel and energy prices, interest rates, consumer confidence, value of the United States dollar versus foreign currencies, and other macroeconomic factors. A deterioration in economic conditions may reduce the level of consumer spending and inhibit consumers' use of credit, which may adversely affect our revenues and profits. In recessionary periods or periods of slow growth, we may have to increase the number of promotional sales or otherwise dispose of inventory, including fabric, for which we have previously paid to manufacture or committed to, which could adversely affect our profitability. Our financial performance may be particularly susceptible to economic and other conditions in regions or states where we have a significant number of stores.
In addition, difficult economic conditions may exacerbate some of the other risks described in this Item 1.A. Risk Factors, including those risks associated with increased competition, decreases in mall traffic, brand reputation, our ability to develop and maintain a reliable omni-channel customer experience, our ability to execute our growth strategy and achieve our strategic objectives, the interruption of the production and flow of merchandise, and leasing substantial amounts of space. The risks could be exacerbated individually or collectively.
Our ability to attract customers to our stores that are located in malls or other shopping centers depends heavily on the success of these malls and shopping centers, and continued decreases in customer traffic in these malls or shopping centers, whether due to the growing preference for online shopping or otherwise, could cause our net sales and our profitability to be less than expected.
A significant number of our stores are located in malls and other shopping centers and many of these malls and shopping centers have been experiencing declines in customer traffic. Our sales at these stores are dependent, to a significant degree, upon the volume of traffic in those shopping centers and the surrounding area, however our costs associated with these stores are essentially fixed. In times of declining traffic and sales, our ability to leverage these costs and our profitability are negatively impacted. Our stores benefit from the ability of a shopping center's other tenants to generate consumer traffic in the vicinity of our stores and the continuing popularity of the shopping center as a shopping destination. Our sales volume and traffic has been and we expect will continue to be adversely affected by, among other things, the decrease in popularity of malls or other shopping centers in which our stores are located, the closing of anchor stores important to our business, and declines in popularity of other stores in the malls or shopping centers in which our stores are located. Furthermore, a deterioration in the financial condition of shopping center operators or developers could, for example, limit their ability to invest in improvements and finance tenant improvements for us and other retailers. Further reduction in consumer traffic as a result of these or any other factors could have a material adverse effect on us.
We face significant competition that could adversely affect our ability to generate higher net sales and margins.
We face substantial competition in the specialty retail apparel and accessories industry. Some of our competitors have greater financial, marketing, and other resources available. Many of our competitors sell their products in stores that are located in the same shopping malls or lifestyle centers as our stores and many also sell their products online either exclusively or in addition to brick-and-mortar stores. We expect the retail environment for apparel to remain highly competitive which may result in lower prices, more promotions, and lower product margins. In addition to competing for sales, we compete for favorable site locations and lease terms in shopping malls and lifestyle centers, and our competitors may be able to secure more favorable locations than us as a result of their relationships with, or appeal to, landlords or their willingness and ability to pay more for leased space. We also compete with other retailers and service-based businesses for personnel. The competition for retail talent is increasing, and we may not be able to secure the talent we need to operate our stores without increasing wages. We cannot
assure you that we will be able to compete successfully against existing or future competitors or maintain our product margins, and our inability to do so could have a material adverse effect on us.
We do not own or operate any manufacturing facilities and therefore depend upon third parties for the manufacture of all of our merchandise. The inability of a manufacturer to ship goods on-time to our specifications or to operate in compliance with our Vendor Code of Conduct or applicable laws could negatively impact our business.
We do not own or operate any manufacturing facilities. As a result, we are dependent upon the timely receipt of quality merchandise from third-party vendors. A manufacturer's inability to ship orders to us in a timely manner or meet our quality standards could cause inventory shortages or high levels of out-of-season inventory and negatively affect consumer confidence in the quality and value of our brand and our competitive position, all of which could have a material adverse effect on our financial condition and results of operations.
If any of our manufacturers fail to comply with applicable laws or our Vendor Code of Conduct, or engage in any socially unacceptable business practices such as poor working conditions, child labor, disregard for environmental standards, or otherwise, our brand reputation could be negatively impacted and our results of operations could in turn be materially adversely affected.
The raw materials used to manufacture our products and our transportation and labor costs are subject to availability constraints and price volatility, which could result in increased costs.
The raw materials used to manufacture our merchandise are subject to availability constraints and price volatility caused by demand for cotton, petroleum-based synthetic textiles, and other fabrics, weather conditions, supply conditions, government regulations, economic climate, and other unpredictable factors. In addition, our transportation and labor costs are subject to price volatility caused by the price of energy, supply of labor, governmental regulations, economic climate, and other unpredictable factors.
Increases in the demand for, or the price of, raw materials used to manufacture our merchandise and increases in transportation and labor costs could each have a material adverse effect on our cost of sales or our ability to meet our customers' needs. We may not be able to pass all or a material portion of such increased costs on to our customers, which could negatively impact our profitability.
The interruption of the flow of merchandise from international manufacturers or increased tariffs on imports could disrupt our supply chain.
We purchase the majority of our merchandise outside of the United States through arrangements with approximately 95 vendors, utilizing approximately 375 manufacturing facilities located throughout the world, primarily in Asia and Central and South America. Political, social, or economic instability in Asia, Central, or South America, or in other regions where our products are made, could cause disruptions in trade, including exports. Other events that could also cause disruptions to our supply chain include:
| |
• | the imposition of additional trade law provisions or regulations; |
| |
• | the imposition of additional duties, tariffs, and other charges on imports and exports; |
| |
• | quotas imposed by bilateral textile agreements; |
| |
• | foreign currency fluctuations; |
| |
• | natural disasters and theft; |
| |
• | restrictions on the transfer of funds; |
| |
• | the financial instability or bankruptcy of manufacturers; and |
| |
• | significant labor disputes. |
We cannot predict whether the countries in which our merchandise is manufactured, or may be manufactured in the future, will be subject to new or additional trade restrictions imposed by the United States or other foreign governments, including the likelihood, type, or effect of any such restrictions. The U.S. government is contemplating various actions regarding trade with China, including the possibility of levying various tariffs on imports from China. We source a significant amount of our goods from China and so any tariffs or other trade restrictions impacting the import of apparel and accessories from China would have a material adverse impact on us. Trade restrictions, including new or increased tariffs or quotas, embargoes, safeguards, and customs restrictions against apparel items, as well as labor strikes and work stoppages or boycotts, could increase the cost or
reduce or delay the supply of apparel available to us and adversely affect our business, financial condition, or results of operations.
If we encounter difficulties associated with distribution facilities or if they were to shut down for any reason, we could face shortages of inventory in our stores, delayed shipments to our online customers, and harm to our reputation.
Our distribution facilities are operated by third parties. Our Columbus facility operates as our central distribution facility and supports our entire North American business. All of our merchandise is shipped to the central distribution facility from our vendors and is then packaged and shipped to our stores or the Richwood Facility for further distribution to our online customers. The success of our stores and the satisfaction of our online customers depend on their timely receipt of merchandise. The efficient flow of our merchandise requires that the third parties who operate the distribution facilities have adequate capacity and labor to support our current level of operations and any anticipated increased levels that may follow from the growth of our business or during peak seasons.
If we encounter labor and capacity constraints, difficulties with the distribution facilities or in our relationships with the third parties who operate the facilities, or if either facility were to shut down for any reason, including as a result of fire or other natural disaster or work stoppage, we could face shortages of inventory, resulting in “out of stock” conditions in our stores, incur significantly higher costs and longer lead times associated with distributing our products to both our stores and online customers, and experience dissatisfaction from our customers. Any of these issues could have a material adverse effect on our business and harm our reputation.
Natural disasters, fire, and other events beyond our control may cause business disruption and result in unexpected adverse operating results.
Our corporate offices and other facilities on which we rely are vulnerable to damage from natural disasters, fire, acts of terrorism, and other unexpected events which could cause us to experience significant disruption in our business, resulting in lost sales and productivity, and causing us to incur significant expense to repair, any of which could have a material adverse effect on our business.
We rely upon independent third-party transportation providers for substantially all of our product shipments and are subject to increased shipping costs as well as the potential inability of our third-party transportation providers to deliver on a timely basis.
We currently rely upon independent third-party transportation providers for substantially all of our product shipments, including shipments to and from all of our stores and to our customers. Our utilization of these delivery services for shipments is subject to risks which may impact a shipping company’s ability to provide delivery services that adequately meet our shipping needs, include risks related to employee strikes, labor and capacity constraints, and inclement weather. In addition, we are subject to increased shipping costs when fuel prices increase, when we use expedited means of transportation such as air freight, and due to other economic factors affecting supply and demand within the transportation industry. If we change the shipping companies we use, we could face logistical difficulties that could adversely affect deliveries, and we would incur costs and expend resources in connection with such change. Moreover, we may not be able to obtain terms as favorable as those received from our current independent third-party transportation providers which, in turn, would increase our costs.
We rely on third parties to provide us with certain key services for our business. If any of these third parties fails to perform their obligations to us or declines to provide services to us in the future, we may suffer a disruption to our business. Furthermore, we may be unable to provide these services or implement substitute arrangements on a timely basis with terms favorable to us.
We rely on many different third parties to provide us with key services. For example, we rely on a third party to operate our central distribution facility in Columbus, Ohio and to provide certain inbound and outbound transportation and delivery services, distribution services, and customs services. We also rely on another third party to provide us with logistics and other services related to our e-commerce operations and another third party to provide telephone and online support to our customers. In connection with our sourcing activities, we rely on approximately 95 buying agents and vendors to help us source products from approximately 375 manufacturing facilities, and in connection with our marketing activities, we rely on third parties to administer our customer database, our loyalty program, our private label credit card program, and our gift cards. We also rely on third-party technology providers to provide us with various technology services and we rely on a third party to administer certain aspects of our payroll. If any of these third parties fails to perform their obligations to us or declines to provide services to us in the future, we may suffer a disruption to our business, increased costs, harm to our brand, and loss of customers. Furthermore, we may be unable to provide these services or implement substitute arrangements on a timely and cost-effective basis on terms favorable to us.
Strategic Risk Factors
Our business is highly dependent upon our ability to identify and respond to new and changing fashion trends, customer preferences, and other related factors. Our inability to identify and respond to these new trends may lead to inventory markdowns and write-offs, which could adversely affect us and our brand image.
Our focus on fashion-conscious young women and men means that we have a target market of customers whose preferences cannot be predicted with certainty and are subject to frequent change. Our success depends in large part upon our ability to effectively identify and respond to changing fashion trends and consumer demands and to translate market trends into desired product offerings. Our failure to identify and react appropriately to new and changing fashion trends or tastes, or to accurately forecast demand for certain product offerings could lead to, among other things, excess or insufficient amounts of inventory, markdowns, and write-offs, which could materially adversely affect our business. Because our success depends significantly on our brand image, damage to our brand image as a result of our failure to identify and respond to changing fashion trends could have a material negative impact on us.
We often place orders for the manufacture and purchase of merchandise, including fabric, well ahead of the season in which that merchandise will be sold. Therefore, we are vulnerable to changes in consumer preference and demand between the time we design and order our merchandise and the season in which this merchandise will be sold. There can be no assurance that we will be able to adequately and timely respond to the preferences of our customers. The failure of any of our product offerings to appeal to our customers could have a material adverse effect on our business, results of operations, and financial condition.
Our sales, profitability, and cash levels fluctuate on a seasonal basis and are affected by a variety of factors, including consumer demand, our product offerings relative to customer demand, the mix of merchandise we offer, promotions, inventory levels, and our sales mix between stores and e-commerce.
Our sales and results of operations are affected on a seasonal basis by a variety of factors, including consumer demand, our product offerings relative to customer demand, changes in our merchandise mix, the timing, number, and types of promotions we offer, actions of our competitors or mall anchor tenants, the ratio of online sales to store sales, the effectiveness of our inventory management, holiday and seasonal periods, changes in general economic conditions and consumer spending patterns, customer traffic, and weather conditions. As a result, our results of operations fluctuate on a quarterly basis and relative to corresponding periods in prior years, and any of these factors could adversely affect our business and could cause our financial results to decline. For example, our third and fourth quarter net sales are impacted by early Fall shopping trends and the holiday season. Any significant decrease in net sales during the early Fall selling period or the holiday season would have a material adverse effect on us. In addition, in order to prepare for these seasons, we must order and keep in stock significantly more merchandise than we carry during other parts of the year. This inventory build-up may require us to expend cash faster than we generate it by our operations during this period. Any unanticipated decrease in demand for our products during these peak shopping seasons could require us to sell excess inventory at a substantial markdown. Our profitability is negatively impacted by the shift of sales from stores, which have higher fixed costs, to e-commerce, which has higher variable costs. A continued shift in sales away from stores to e-commerce could have a material adverse effect on our business, results of operations, and financial condition.
Our business depends in part on a strong brand image. If we are unable to maintain and enhance our brand, or our brand reputation is damaged for any reason, we may fail to attract customers and suffer a significant decline in sales.
Our ability to maintain our reputation and meet the expectations of our customers is critical to our brand image. Our reputation could be jeopardized if we fail to maintain high standards for merchandise quality and customer experience, fail to maintain high ethical, social, and environmental standards for all of our operations and activities, or we fail to appropriately respond to concerns associated with any of the foregoing or any other concerns from our customers. Failure to comply with local laws and regulations, to maintain an effective system of internal controls, or to provide accurate and timely financial statement information could also hurt our reputation. We also rely on franchisees to help us maintain our brand image and any failure to do so could have a negative impact on us. Damage to our reputation or loss of consumer confidence for any of these reasons may reduce demand for our products and have a material adverse effect on our business, financial condition, and results of operations, as well as require additional resources to rebuild our reputation.
Consumer behavior is rapidly changing, and if we are unable to successfully adapt to consumer shopping preferences and develop and maintain a relevant and reliable omni-channel experience for our customers, our financial performance and brand image could be adversely affected.
Our business continues to evolve from a largely brick-and-mortar retail business to an omni-channel retail business. While historically we interacted with our customers largely through our in-store experience, the traditional mall retail landscape is changing and increasingly we interact with our customers across a variety of different channels, including in-store, online at www.express.com, through mobile technologies, including the Express mobile app, and social media. Our customers are increasingly using tablets and mobile phones to make purchases online and to help them in making purchasing decisions when in our stores. Our customers also engage with us online, including through social media, by providing feedback and public commentary about all aspects of our business. Consumer shopping patterns are rapidly changing and our success depends on our ability to anticipate and implement innovations in customer experience and logistics in order to appeal to customers who increasingly rely on multiple channels to meet their shopping needs. If for any reason we are unable to implement our omni-channel initiatives, provide a convenient and consistent experience for our customers across all channels, or provide our customers the products they want, when and where they want them at a compelling value proposition, then our financial performance and brand image could be adversely affected.
We depend on key executive management and may not be able to retain or replace these individuals or recruit additional personnel, which could harm our business.
We depend on the leadership and experience of our key executive management. The loss of the services of any of our key executives could have a material adverse effect on our business and prospects, as we may not be able to find suitable individuals to replace them on a timely basis or without incurring increased costs, or at all. We believe that our future success will depend greatly on our continued ability to attract and retain highly skilled and qualified personnel. There is a high level of competition for experienced, successful talent in the retail industry. Our inability to meet our talent requirements in the future could impair our growth and harm our business.
Our growth strategy includes: improving profitability through sales growth, margin expansion, and expense leverage; providing an exceptional brand and customer experience; transforming and leveraging our systems and processes; and cultivating a strong company culture. In furtherance of our growth strategy, we are focused on the following strategic objectives: delivering compelling merchandise at an attractive value; investing in growing brand awareness and retaining and acquiring new customers to the Express brand; growing e-commerce sales and expanding our omni-channel capabilities; optimizing our store footprint; and managing our overall cost structure. The success of our growth strategy depends on our ability to achieve our strategic objectives. Failure to execute our growth strategy or achieve our strategic objectives could have a material negative effect on the value of the Company.
Our ability to improve the profitability of the Company is dependent on our ability to deliver compelling new merchandise at an attractive value, retain and acquire new customers, grow our e-commerce business, expand our omni-channel capabilities, such as ship-from-store and buy-online-pick-up-in-store capabilities, provide an exceptional customer experience, optimize our retail store footprint, open new outlet stores, and manage our overall cost structure. The success of these initiatives is dependent on a number of factors. For example, our ability to deliver compelling new merchandise at an attractive value is dependent on our ability to accurately forecast fashion trends and customer demand for products. Also, given the rapid pace of change, our ability to provide an exceptional customer experience, transform and leverage our systems and processes, increase brand awareness, retain and acquire new customers, grow our e-commerce business, and expand our omni-channel capabilities, may require significant financial investments that may not provide a return in the near term or at all.
Our ability to close stores, convert retail stores to outlet stores, or make other changes to our store fleet is limited by the terms of our existing leases. We are also reliant upon our ability to obtain desirable store locations, negotiate acceptable leases, and open stores on budget and in a timely manner. We historically have received landlord allowances related to store build outs which offset certain capital expenditures we must make to open a new store. If landlord allowances cease to be available to us in the future or are decreased, opening new stores would require more capital outlay. Furthermore, to the extent we open new outlet stores in markets where we have existing stores, our existing stores in those markets may experience reduced net sales.
Furthermore, our efforts to reduce expenses may have an adverse impact on our ability to achieve our strategic objectives by limiting the funding necessary to achieve such objectives or may impact product quality or in-store customer experience as we seek to reduce costs in our supply chain. Successful execution of our growth strategy is dependent on our ability to achieve our strategic objectives. There can be no guarantee that we will achieve our strategic objectives or that our that our growth strategy will result in improved operating results or an increase in the value of the business.
Information Technology Risk Factors
We rely significantly on information systems and any failure, inadequacy, interruption, or security failure of those systems could harm our ability to effectively operate our business, cause a decrease in our net sales, increase our expenses, and harm our reputation.
Our ability to effectively manage and maintain our inventory, ship products to our stores and our customers on a timely basis, communicate with our customers, conduct customer transactions, and otherwise operate our business depends significantly on our information systems. The failure of our information systems to operate effectively, problems with transitioning to upgraded or replacement systems, or a breach in security of these systems could adversely impact our merchandise distribution, transaction processing, financial accounting and reporting, the efficiency of our operations, and our ability to properly forecast earnings and cash requirements. We could be required to make significant additional expenditures to remediate any such failure, problem, or breach, and may be subject to legal claims as a result of such failure. To effectively carry out our growth strategy, we will need to continue to invest funds in order to maintain and improve our systems. Delays or issues during such implementations may have a material adverse effect on us.
We sell merchandise through our website, www.express.com. Our online sales may be adversely affected by interruptions in our ability to conduct sales through our website, due to failure of computer systems, failure of third-party technology and service providers on which we rely, telecommunications failures, security breaches, denial of service attacks, sabotage, or similar disruptions. Furthermore, functionality on our website may be limited or interrupted to the extent technology we use becomes the subject of a patent or other intellectual property dispute and we are unable to secure a license to use such technology or develop alternative functionality.
In addition, we may be the target of attempted cyber attacks, computer viruses, malicious code, phishing attacks, denial of service attacks and other information security threats. To date, cyber attacks have not had a material impact on our financial condition, results or business; however, we could suffer material financial or other losses in the future and we are not able to predict the severity of these attacks. Our risk and exposure to these matters remains heightened because of, among other things, the evolving nature of these threats, the current global economic and political environment, our prominent size and scale, the outsourcing of some of our business operations, the ongoing market shortage of qualified cyber security professionals, and the interconnectivity and interdependence of third parties to our systems. The occurrence of a cyber attack, breach, unauthorized access, misuse, computer virus, or other malicious code or other cyber security event could jeopardize or result in the unauthorized disclosure, gathering, monitoring, misuse, corruption, loss, or destruction of confidential and other information that belongs to us, our customers, our counterparties, or third-party service providers that is processed and stored in, and transmitted through, our computer systems and networks. The occurrence of such an event could also result in damage to our software, computers or systems, or otherwise cause interruptions or malfunctions in our counterparties’ or third parties’ operations. This could result in significant losses, loss of customers and business opportunities, reputational damage, litigation, regulatory fines, penalties or intervention, reimbursement or other compensatory costs, or otherwise adversely affect our business, financial condition or results of operations. Employee error, malfeasance, or other errors in the storage, use, or transmission of any such information could result in a disclosure of confidential information to third parties outside of our network. Any of these events could result in litigation and legal liability, harm to our reputation, loss of confidence in our ability to protect sensitive information, a distraction to our business, and the need to divert resources to remedy the issues, any of which could have a material adverse effect on our business.
We may be exposed to risks and costs associated with the loss of customer information that would cause us to incur unexpected expenses, loss of revenues, and reputational harm.
We collect customer data, including encrypted credit card information, in our stores and online. For our sales channels to function successfully, we and third parties involved in processing customer transactions for us must be able to transmit confidential information, including credit card information, securely over public networks. We cannot guarantee that any of our security measures or the security measures of third parties with whom we work will effectively prevent others from obtaining unauthorized access to our customers’ information. If such a breach were to occur, customers could lose confidence in our ability to secure their information and choose not to purchase from us. Any unauthorized access to customer information could expose us to data loss or manipulation, litigation and legal liability, and could seriously disrupt operations, negatively impact our marketing capabilities, cause us to incur significant expenses to notify customers of the breach and for other remediation activities, and harm our reputation and brand, any of which could adversely affect our financial condition and results of operations.
In addition, state, federal, and foreign governments are increasingly enacting laws and regulations to protect consumers against identity theft and consumer privacy. These laws and regulations will likely increase the costs of doing business, and if we fail to implement appropriate procedures, security measures, or detect and provide prompt notice of unauthorized access as required
by some of these laws and regulations, we could be subject to potential claims for damages and other remedies, which could adversely affect our business and results of operations.
Financial Risk Factors
We have, and will continue to have, significant lease obligations. We are subject to risks associated with leasing substantial amounts of space, including future increases in occupancy costs and the need to generate significant cash flow to meet our lease obligations.
We have, and will continue to have, significant lease obligations. We lease all of our store locations, our corporate offices, and our central distribution facility. We typically occupy our stores under operating leases with initial terms of ten years, with options to renew for additional multi-year periods thereafter. In the future, we may not be able to negotiate favorable lease terms for the most desired store locations. Our inability to do so may cause our occupancy costs to be higher in future years or may force us to close stores in desirable locations.
Some of our leases have early cancellation clauses, which permit the lease to be terminated by us or the landlord if certain sales levels are not met in specific periods or if the center does not meet specified occupancy standards. In addition to future minimum lease payments, some of our store leases provide for additional rental payments based on a percentage of net sales, or “percentage rent,” if sales at the respective stores exceed specified levels, as well as the payment of common area maintenance charges, real property insurance, energy costs, and real estate taxes. Many of our lease agreements have defined escalating rent provisions over the initial term and any extensions.
We depend on cash flow from operations to pay our lease expenses. If our business does not generate sufficient cash flow from operating activities to fund these expenses, due to continued decreases in mall traffic, the highly competitive retail environment, or other factors, we may not be able to service our lease expenses, which could materially harm our business. Furthermore, the significant cash flow required to satisfy our obligations under the leases increases our vulnerability to adverse changes in general economic, industry, and competitive conditions, and could limit our ability to fund working capital, incur indebtedness, and make capital expenditures or other investments in our business.
If an existing or future store is not profitable, and we decide to close it, we may nonetheless be committed to perform our obligations under the applicable lease including, among other things, paying the base rent for the balance of the lease term. Moreover, even if a lease has an early cancellation clause, we may not satisfy the contractual requirements for early cancellation under that lease. As of February 3, 2018, our minimum annual rental obligations under long-term lease arrangements for 2018 and 2019 were $229.9 million and $197.2 million, respectively. Our inability to enter into new leases or renew existing leases on terms acceptable to us or be released from our obligations under leases for stores that we close could materially adversely affect us.
The terms of our Revolving Credit Facility may restrict our current and future operations, which could adversely affect our ability to respond to changes in our business and to manage our operations.
We are party to an Asset Based Loan Credit Agreement ("Revolving Credit Facility") that allows us to borrow up to $250 million, subject to certain terms and conditions contained in the agreement. The terms of the Revolving Credit Facility contain, and any agreements governing any future indebtedness may contain, financial restrictions on us and our ability to, among other things:
| |
• | place liens on our assets; |
| |
• | make investments other than permitted investments; |
| |
• | incur additional indebtedness; |
| |
• | prepay certain indebtedness; |
| |
• | merge, consolidate or dissolve; |
| |
• | engage in transactions with affiliates; |
| |
• | change the nature of our business; |
| |
• | change our fiscal year or organizational documents; and |
| |
• | make other restricted payments, including share repurchases and dividends. |
In addition, the Revolving Credit Facility requires us to maintain a fixed charge coverage ratio of 1.00 to 1.00, if excess availability plus eligible cash collateral is less than 10% of the borrowing base for 15 consecutive days.
A failure by us to comply with the covenants or to maintain the required financial ratios contained in the Revolving Credit Facility could result in an event of default under such indebtedness, which could adversely affect our ability to respond to changes in our business and manage our operations. Upon the occurrence of an event of default, the lenders under our Revolving Credit Facility could elect to declare all amounts outstanding to be due and payable and exercise other remedies as set forth in the agreement and there can be no assurance that our assets would be sufficient to repay any indebtedness in full, which could have a material adverse effect on our ability to continue to operate as a going concern. See Note 8 to our Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K for further information relating to our indebtedness.
We may recognize impairment on long-lived assets.
Our long-lived assets, primarily stores and intangible assets, are subject to periodic testing for impairment. Store assets are reviewed using factors including, but not limited to, our future operating plans and projected future cash flows. Failure to achieve our future operating plans or generate sufficient levels of cash flow at our stores could result in impairment charges on long-lived assets, which could have a material adverse effect on our financial condition or results of operations.
Regulatory and Legal Risk Factors
There are claims made against us from time to time that can result in litigation or regulatory proceedings which could distract management from our business activities and result in significant liability.
We face the risk of litigation and other claims against us. Litigation and other claims arise in the ordinary course of our business and include commercial disputes, employment related claims, including wage and hour claims, intellectual property disputes, such as trademark, copyright, and patent infringement disputes, consumer protection and privacy matters, product-related allegations, and premises liability claims. See Note 13 to our Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K. The Company has been named as a defendant in two separate representative actions in the State of California alleging violations of the California state wage and hour statutes and other labor standards.
Any claims could result in litigation against us and could also result in regulatory proceedings being brought against us by various federal and state agencies that regulate our business, including the United States Equal Employment Opportunity Commission, the Federal Trade Commission, or the Consumer Product Safety Commission. Often these cases raise complex factual and legal issues, which are subject to risks and uncertainties and could require significant management time. Litigation and other claims and regulatory proceedings against us could result in unexpected expenses, legal liability, and injunctions against us or restrictions placed upon us, which could disrupt our operations, preclude us from selling products, or otherwise have a material adverse effect on our operations, financial results, and reputation.
Changes in laws, including employment laws and laws related to our merchandise, could make conducting our business more expensive or otherwise change the way we do business.
We are subject to numerous laws and regulations, including labor and employment, product safety, customs, consumer protection, privacy, zoning laws and ordinances, intellectual property laws, and other laws that regulate retailers generally or govern the import and export of goods, advertising and promotions, the sale of merchandise, product content, and the operation of stores, our website, and warehouse facilities. If these regulations were to change or were violated by our management, employees, vendors, or buying agents, the costs of certain goods could increase, or we could experience delays in shipments of our goods, be subject to fines or penalties, or suffer reputational harm, which could reduce demand for our merchandise and hurt our business and results of operations.
In addition to increased regulatory compliance requirements, changes in laws could make ordinary conduct of our business more expensive or require us to change the way we do business. For example, changes in federal and state minimum wage laws could continue to raise the wage requirements for certain of our employees. Other laws related to employee benefits and treatment of employees, including laws related to limitations on employee hours, work scheduling, supervisory status, leaves of absence, mandated health benefits, or overtime pay, could also negatively impact us, by increasing administrative compensation and benefits costs.
Moreover, changes in product safety or other consumer protection laws, environmental laws, and other regulations, could lead to increased compliance costs. It is often difficult for us to plan and prepare for potential changes to applicable laws and future compliance costs related to such changes could be material to us.
We may be unable to protect our trademarks or other intellectual property rights, may be precluded from using trademarks in certain countries, and may face claims from third parties for intellectual property infringement, any of which could harm our business.
We rely on certain trademark registrations and common law trademark rights to protect the distinctiveness of our brand. However, there can be no assurance that the actions we have taken to establish and protect our trademarks will be adequate to prevent imitation of our trademarks by others or to prevent others from claiming that sales of our products infringe, dilute, or otherwise violate third-party trademarks or other proprietary rights that could block sales of our products.
The laws of certain foreign countries may not protect the use of unregistered trademarks to the same extent as do the laws of the United States. As a result, international protection of our brand may be limited, and our right to use our trademarks outside the United States could be impaired. Other persons or entities may have rights to trademarks that contain portions of our marks or may have registered similar or competing marks for apparel and/or accessories in foreign countries. There may also be other prior registrations of trademarks identical or similar to our trademarks in other foreign countries. Accordingly, it may be possible for others to prevent the sale or manufacture of our branded goods or the operation of Express brick-and-mortar or online stores in certain foreign countries. Our inability to register our trademarks or purchase or license the right to use the relevant trademarks in these jurisdictions could limit our ability to penetrate new markets in jurisdictions outside the United States.
Litigation may be necessary to protect and enforce our trademarks and other intellectual property rights, or to defend against claims by third parties alleging that we infringe, dilute, or otherwise violate third-party trademarks or other intellectual property rights. Any litigation or claims brought by or against us, whether with or without merit, and whether successful or not, could result in substantial costs and diversion of our resources, which could have a material adverse effect on our business, financial condition, results of operations, or cash flows. Any intellectual property litigation or claims against us could result in the loss or compromise of our intellectual property rights, could subject us to significant liabilities, require us to seek licenses on unfavorable terms, if available at all, prevent us from manufacturing or selling certain products, limit our ability to market or sell to our customers using certain methods or technologies, and/or require us to redesign or re-label our products or rename our brand, any of which could have a material adverse effect on our business, financial condition, results of operations, or cash flows.
Changes in tax law, tax requirements, results of tax audits, and other factors may cause fluctuations in our effective tax rate and operating results.
We are subject to income tax in local, national, and international jurisdictions. Our tax returns and other tax matters are also subject to examination by the Internal Revenue Service and other tax authorities and governmental bodies. These examinations may challenge certain of our tax positions, such as the timing and amount of deductions and allocations of taxable income to various jurisdictions. The results of any tax audits could adversely affect our financial results. Furthermore, our effective tax rate in a given period may be materially impacted by changes in the mix and level of earnings by taxing jurisdiction and deductibility of stock based compensation.
On December 22, 2017, Congress passed the Tax Cuts and Jobs Act (the “TCJA”). Among a number of significant changes to the U.S. federal income tax rules, the TCJA reduces the marginal U.S. corporate income tax rate from 35% to 21%, limits the deduction for net interest expense, limits the deduction for net operating losses, eliminates net operating loss carrybacks, modifies or repeals many business deductions and credits, shifts the United States toward a more territorial tax system, and imposes new taxes to combat erosion of the U.S. federal income tax base. Certain of our assets and liabilities will be revalued at the newly enacted U.S. corporate rate, and the impact will be recognized in our tax expense in the year of enactment. We continue to examine the impact this tax reform legislation may have on our business. However, the effect of the TCJA on us and our affiliates, whether adverse or favorable, is uncertain, and may not become evident for some period of time.
Our products are subject to import and excise duties and/or sales or value-added taxes in many jurisdictions. Major changes in tax law, policy or trade relations, including but not limited to the foregoing, as well as the imposition of unilateral tariffs on imported products, could have a material adverse effect on our business, results of operations and liquidity.
If we fail to establish and maintain adequate internal controls over financial reporting, we may not be able to report our financial results in a timely and reliable manner, which could harm our business and impact the value of our securities.
We depend on our ability to produce accurate and timely financial statements in order to run our business. If we fail to do so, our business could be negatively affected and our independent registered public accounting firm may be unable to attest to the fair presentation of our Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K in accordance with U.S. generally accepted accounting principles (“GAAP”) and the effectiveness of our internal control over
financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. Effective internal controls are necessary for us to provide reliable financial reports and to effectively prevent fraud. If we cannot provide reliable financial reports and effectively prevent fraud, our reputation and operating results could be harmed. Even effective internal controls have inherent limitations, including the possibility of human error, the circumvention or overriding of controls, or fraud. Therefore, even effective internal controls can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements. In addition, projections of any evaluation of effectiveness of internal control over financial reporting in future periods are subject to the risk that the control may become inadequate because of changes in conditions or a deterioration in the degree of compliance with the policies or procedures.
If we fail to maintain adequate internal controls, including any failure to implement new or improved controls, or if we experience difficulties in their execution, we could fail to meet our reporting obligations, and there could be a material adverse effect on our business and financial results. In the event that our current control practices deteriorate, we may be unable to accurately report our financial results or prevent fraud, and investor confidence and the market price of our stock may be adversely affected.
Stock Ownership Risk Factors
Our ability to pay dividends and repurchase shares is subject to restrictions in our Revolving Credit Facility, results of operations, and capital requirements.
Any determination to pay dividends or repurchase additional shares in the future will be at the discretion of our Board of Directors and will depend upon our results of operations, our financial condition, restrictions imposed by applicable law, and other factors our Board of Directors deems relevant. Our ability to pay dividends on or repurchase our common stock is limited by the terms of the Revolving Credit Facility and may be further restricted by the terms of any future debt or preferred securities. Additionally, because we are a holding company, our ability to pay dividends on our common stock or repurchase shares is limited by restrictions on the ability of our subsidiaries to pay dividends or make distributions to us, including restrictions under the terms of the Revolving Credit Facility.
Anti-takeover provisions in our charter documents and Delaware law may discourage or delay acquisition attempts for us that our stockholders might consider favorable.
Our certificate of incorporation and bylaws contain provisions that may make the acquisition of the Company or a change in our management or Board of Directors more difficult without the approval of our Board of Directors. These provisions do the following:
| |
• | establish a classified Board of Directors so that not all members of our Board of Directors are elected at one time; |
| |
• | authorize the issuance of undesignated preferred stock, the terms of which may be established, and the shares of which may be issued without stockholder approval, and which may include super voting, special approval, dividend, or other rights or preferences superior to the rights of the holders of common stock; |
| |
• | prohibit stockholder action by written consent, which requires all stockholder actions to be taken at a meeting of our stockholders; and |
| |
• | establish advance notice requirements for nominations for elections to our Board of Directors or for proposing matters that can be acted upon by stockholders at stockholder meetings. |
Our certificate of incorporation also contains a provision that provides us with protections similar to Section 203 of the Delaware General Corporation Law, that will prevent us from engaging in a business combination with a person who acquires at least 15% of our common stock for a period of 3 years from the date such person acquired such common stock, unless Board or stockholder approval is obtained prior to the acquisition. These anti-takeover provisions and other provisions under Delaware law could discourage, delay, or prevent a transaction involving a change in control of our company, even if doing so would benefit our stockholders. These provisions could also discourage proxy contests and make it more difficult for stockholders to elect directors of their choosing and to cause us to take other corporate actions desired by stockholders.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.
ITEM 2. PROPERTIES.
Home Office, Distribution Center, Design Studio, and Photo Studio
The lease for our corporate headquarters in Columbus, Ohio is scheduled to terminate in April 2021. The lease for our design offices in New York City expires in July 2026. We also lease a photo studio in downtown Columbus. That lease expires in December of 2024.
The lease for our distribution facility in Columbus, Ohio is scheduled to terminate in April 2021, but may be terminated by either party upon 36 months prior notice provided that the lease term may not end between the months of October and February.
Stores
All of our 635 stores are leased from third parties. See "Item 1. Business - Store Locations" for further information on the locations of our stores.
We may from time to time lease new facilities or vacate existing facilities as our operations require, including in connection with opening new stores.
ITEM 3. LEGAL PROCEEDINGS.
Information relating to legal proceedings is set forth in Note 13 to our Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K and is incorporated herein by reference.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Our common stock trades on the NYSE under the symbol "EXPR". As of March 16, 2018, there were approximately 10 holders of record of our common stock. The number of holders of record is based upon the actual number of holders registered at such date and does not include holders of shares in “street name,” or persons, partnerships, associates, corporations, or other entities identified in security position listings maintained by depositories.
The table below sets forth the high and low sales prices per share of our common stock reported on the NYSE for 2017 and 2016.
|
| | | | | | | | | | | | | | | |
| 2017 | | 2016 |
| High | | Low | | High | | Low |
Fourth quarter | $ | 11.34 |
| | $ | 6.35 |
| | $ | 14.39 |
| | $ | 10.03 |
|
Third quarter | $ | 7.45 |
| | $ | 5.28 |
| | $ | 16.38 |
| | $ | 11.28 |
|
Second quarter | $ | 10.00 |
| | $ | 5.84 |
| | $ | 18.26 |
| | $ | 13.25 |
|
First quarter | $ | 11.70 |
| | $ | 7.89 |
| | $ | 21.57 |
| | $ | 15.53 |
|
Dividends
We did not pay any dividends in 2017 or 2016. Our ability to pay dividends is restricted by the terms of our Revolving Credit Facility. Any future determination to pay dividends will be made at the discretion of our Board of Directors and will depend on our results of operations, restrictions contained in our Revolving Credit Facility or future financing arrangements, and other factors as deemed relevant. For more information about the restrictions in our Revolving Credit Facility, see Note 8 to our Consolidated Financial Statements included elsewhere in this Annual Report on 10-K.
Share Repurchases
The following table provides information regarding the purchase of shares of our common stock made by or on behalf of us or any "affiliated purchaser" as defined in Rule 10b-18(a)(3) under the Exchange Act of 1934, during each month of the quarterly period ended February 3, 2018:
|
| | | | | | | | | | | | |
Month | | Total Number of Shares Purchased (1) | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Approximate Dollar Value of Shares that May Yet be Purchased under the Plans or Programs (2) |
| | (in thousands, except per share amounts) |
October 29, 2017 - November 25, 2017 | | 1 |
| | $ | 6.93 |
| | — |
| | $0 |
November 26, 2017 - December 30, 2017 | | 449 |
| | $ | 11.17 |
| | 448 |
| | $145,000 |
December 31, 2017 - February 3, 2018 | | 1,641 |
| | $ | 7.47 |
| | 1,640 |
| | $132,778 |
Total | | 2,091 |
| | | | 2,088 |
| | |
(1) Includes shares purchased in connection with employee tax withholding obligations under the 2010 Plan.
(2) On November 28, 2017, the Board approved a new share repurchase program that authorizes the Company to repurchase up to $150 million of the Company’s outstanding common stock using available cash. The Company may repurchase shares on the open market, including through Rule 10b5-1 plans, in privately negotiated transactions, through block purchases, or otherwise in compliance with applicable laws, including Rule 10b-18 of the Securities Exchange Act of 1934, as amended. The timing and amount of stock repurchases will depend on a variety of factors, including business and market conditions as well as corporate and regulatory considerations. The share repurchase program may be suspended, modified, or discontinued at any time, and the Company has no obligation to repurchase any amount of its common stock under the program.
Performance Graph
The following graph compares the changes in the cumulative total return to holders of our common stock with that of the S&P 500 Index and the Dow Jones U.S. Apparel Retailers Index for the same period. The comparison of the cumulative total returns for each investment assumes that $100 was invested in our common stock and the respective indexes on February 2, 2013, and includes reinvestment of all dividends. The plotted points are based on the closing price on the last trading day of each fiscal year.
COMPARISON OF THE
CUMULATIVE TOTAL RETURN
among Express, Inc., S&P 500 Index,
and Dow Jones U.S. Apparel Retailers Index
|
| | | | | | | | | | | | | | | | | | |
| 2/2/13 | 2/1/14 | 1/31/15 | 1/30/16 | 1/28/17 | 2/3/18 |
Express, Inc. | $ | 100.00 |
| $ | 93.62 |
| $ | 70.70 |
| $ | 91.68 |
| $ | 54.81 |
| $ | 35.95 |
|
S&P 500 Index | $ | 100.00 |
| $ | 117.81 |
| $ | 131.84 |
| $ | 128.22 |
| $ | 151.65 |
| $ | 182.54 |
|
Dow Jones U.S. Apparel Retailers Index | $ | 100.00 |
| $ | 112.12 |
| $ | 133.75 |
| $ | 129.93 |
| $ | 124.06 |
| $ | 135.74 |
|
The Performance Graph in this Item 5 shall not be deemed "soliciting material" or "filed" with the SEC or subject to Regulation 14A or 14C under the Exchange Act of 1934 or to the liabilities of Section 18 of the Exchange Act of 1934 and will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act of 1934, except to the extent we specifically incorporate it by reference into such a filing.
ITEM 6. SELECTED FINANCIAL DATA.
SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OPERATING DATA
The following tables set forth our key financial measures and our selected historical consolidated financial and operating data as of the dates and for the periods indicated. The selected historical consolidated financial and operating data as of February 3, 2018 and January 28, 2017 and for the years ended February 3, 2018, January 28, 2017, and January 30, 2016 are derived from our audited Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K. The selected historical consolidated financial data as of January 30, 2016, January 31, 2015, and February 1, 2014, and the selected operating data for the periods ended January 31, 2015 and February 1, 2014 are derived from our audited Consolidated Financial Statements, which are not included elsewhere in this Annual Report on Form 10-K.
The following selected historical consolidated data presented should be read in conjunction with the sections entitled “Risk Factors,” “Management's Discussion and Analysis of Financial Condition and Results of Operations,” and our Consolidated Financial Statements and the related Notes and other financial data included elsewhere in this Annual Report on Form 10-K.
|
| | | | | | | | | | | | | | | |
| Fiscal Year Ended |
| 2017* | 2016 | 2015 | 2014 | 2013 |
| (dollars in thousands, excluding net sales per gross square foot and per share data) |
Statement of Operations Data: | | | | | |
Net sales | $ | 2,138,030 |
| $ | 2,192,547 |
| $ | 2,350,129 |
| $ | 2,165,481 |
| $ | 2,219,125 |
|
Cost of goods sold, buying and occupancy costs | $ | 1,522,797 |
| $ | 1,529,343 |
| $ | 1,554,852 |
| $ | 1,504,527 |
| $ | 1,501,418 |
|
Gross profit | $ | 615,233 |
| $ | 663,204 |
| $ | 795,277 |
| $ | 660,954 |
| $ | 717,707 |
|
Selling, general, and administrative expenses | $ | 562,088 |
| $ | 559,541 |
| $ | 587,747 |
| $ | 524,041 |
| $ | 504,277 |
|
Operating income | $ | 29,740 |
| $ | 103,601 |
| $ | 207,238 |
| $ | 136,597 |
| $ | 214,259 |
|
Net income | $ | 19,366 |
| $ | 57,417 |
| $ | 116,513 |
| $ | 68,325 |
| $ | 116,539 |
|
Dividends declared per share | $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
|
Earnings per share: | | | | | |
Basic | $ | 0.25 |
| $ | 0.73 |
| $ | 1.39 |
| $ | 0.81 |
| $ | 1.38 |
|
Diluted | $ | 0.25 |
| $ | 0.73 |
| $ | 1.38 |
| $ | 0.81 |
| $ | 1.37 |
|
Weighted Average Diluted Shares Outstanding | 78,870 |
| 79,049 |
| 84,591 |
| 84,554 |
| 85,068 |
|
Other Financial and Operating Data: | | | | | |
Comparable sales (1) | (3 | )% | (9 | )% | 6 | % | (5 | )% | 3 | % |
Comparable sales (excluding e-commerce sales) (1) | (10 | )% | (12 | )% | 4 | % | (7 | )% | (1 | )% |
Total gross square feet (in thousands) (average) | 5,487 |
| 5,604 |
| 5,573 |
| 5,529 |
| 5,439 |
|
Number of stores (at year end) | 635 |
| 656 |
| 653 |
| 641 |
| 632 |
|
Capital expenditures | 57,435 |
| 98,712 |
| $ | 115,343 |
| $ | 115,088 |
| $ | 105,368 |
|
Balance Sheet Data (at period end): | | | | | |
Cash and cash equivalents | $ | 236,222 |
| $ | 207,373 |
| $ | 186,903 |
| $ | 346,159 |
| $ | 311,884 |
|
Working capital (2) | 38,050 |
| 24,363 |
| 19,113 |
| 20,618 |
| (27,630 | ) |
Total assets | 1,187,607 |
| 1,185,189 |
| 1,178,644 |
| 1,278,150 |
| 1,182,670 |
|
Total debt | — |
| — |
| — |
| 199,527 |
| 199,170 |
|
Total stockholders' equity | $ | 654,000 |
| $ | 635,687 |
| $ | 617,953 |
| $ | 556,339 |
| $ | 474,569 |
|
| | | | | |
* 2017 represents a 53-week year. | | | | | |
| |
(1) | Comparable sales have been calculated based upon stores that were open at least twelve full months as of the end of the reporting period. For 2017, comparable sales were calculated based upon the 53-week period ended February 3, 2018 compared to the 53-week period ended February 4, 2017. See full definition of comparable sales in the section titled "How We Assess the Performance of Our Business" in Management's Discussion and Analysis of Financial Condition and Results of Operations. |
| |
(2) | Working capital is defined as current assets, less cash and cash equivalents, less current liabilities. |
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion and analysis summarizes the significant factors affecting the consolidated operating results, financial condition, liquidity, and cash flows of the Company as of and for the periods presented below. The following discussion and analysis should be read in conjunction with our Consolidated Financial Statements and the related Notes included elsewhere in this Annual Report on Form 10-K. 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, including those discussed below and elsewhere in this Annual Report on Form 10-K, particularly in the section entitled “Risk Factors.” All references herein to "2017," "2016," and "2015" refer to the 53-week period ended February 3, 2018 and the 52-week periods ended January 28, 2017, and January 30, 2016, respectively.
Overview
Express is a specialty apparel and accessories retailer offering both women's and men's merchandise. We have over 35 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.
|
|
2017 vs. 2016 |
• Net sales decreased 2% to $2.1 billion• Comparable sales decreased 3%• Comparable sales (excluding e-commerce sales) decreased 10%• E-commerce sales increased 23% to $509 million• Operating income decreased 71% to $29.7 million, which included restructuring charges of $22.9 million related to the exit of our Canadian business• Net income decreased 66% to $19.4 million, which included a negative impact related to our exit from Canada of $12.1 million• Diluted earnings per share decreased 66% to $0.25• The 53rd week added approximately $26 million to net sales and $3 million to net income for 2017 |
The following charts show key performance metrics for 2015, 2016, and 2017:
Update On Our Key Initiatives
|
| | |
Store Performance | | Real Estate Activity |
In 2017, comparable sales (excluding e-commerce sales) decreased 10%. The decrease was primarily driven by the following: • Decreased traffic at our stores as a result of shifting consumer shopping patterns which are leading to traffic challenges in malls; and• Increased promotional activity in our stores.
| | As of February 3, 2018, we operated 635 stores, including 145 factory outlet stores. 2017 store openings and closures: • Opened 41 factory outlet stores in the U.S., 24 of which were converted from existing retail locations;• Closed 45 U.S. retail stores, 24 of which were converted to outlet locations; and • Closed all 17 Canadian retail stores.
We expect for 2018: • Open 38 factory outlet stores, 28 of which will be converted from existing retail locations; and• Close 36 U.S. retail stores, 28 of which will be converted to outlet locations. |
|
| | |
E-commerce | | Progress Against our Other Key Initiatives |
In 2017, our e-commerce sales increased 23% compared to 2016. We believe the increase was primarily driven by: • The shift in customer shopping patterns towards e-commerce and mobile;• Expanded sizing and assortments online; and • Incremental sales from the launch of ship-from-store capabilities.
E-commerce sales represented 24% of net sales in 2017 compared to 19% in 2016. | |
• Cost Savings Initiatives. In 2016, we announced cost savings opportunities of $44 to $54 million which we expect to realize through 2019. We achieved our target of $20 million in costs savings in 2017 and are on track to deliver the $44 to $54 million dollars of annualized cost savings by 2019.
• Increasing Brand Awareness. During 2017, we introduced a new brand architecture focusing on the individual style of our customers. In addition, we increased our content creation capabilities and expanded our relationships with fashion influencers. We also entered into a marketing agreement with the National Basketball Association ("NBA").
• Elevating our Customer Experience. In 2017, we relaunched our Express NEXT loyalty program, making it easier for our customers to enroll and earn rewards. This led to significant year-over-year growth in Express NEXT sign ups. In addition, we successfully launched ship-from-store capabilities, which allows us to fulfill orders that may be out of stock at our online fulfillment distribution center. |
Outlook
We remain committed to our long-term growth strategy that includes (1) improving profitability through sales growth, margin expansion, and expense leverage, (2) providing an exceptional brand and customer experience, (3) transforming and leveraging our systems and processes, and (4) fostering a strong Company culture. In furtherance of our strategy, for 2018, we are focused on the following strategic objectives:
Delivering Compelling Product at an Attractive Value. In the first quarter of 2018, we re-launched our Express One Eleven product line which is a key part of our Spring casual knits offering. The One Eleven line features newness and a wide range of fits. In the second quarter of 2018, we plan to extend our size offering in men’s and women’s merchandise in over 125 of our retail stores. This is in addition to the extended sizing we already offer online. Our wear-to-work merchandise will also be a key priority for us throughout 2018.
Investing in Growing Brand Awareness and Retaining and Acquiring New Customers to the Express Brand. In 2018, we will continue to invest in growing brand awareness and customer engagement through a variety of media and marketing programming, including search, digital, and social marketing. We will also continue to work with fashion influencers and a
broad range of social media influencers. We believe that our Express NEXT loyalty program plays an important role in customer retention, engagement, and purchasing behavior. For 2018, we plan to add more services and improve the personalization for NEXT loyalty program members in order to increase customer engagement.
Growing e-Commerce and Expanding Omni-Channel Capabilities. In 2018, we will expand our assortment online and continue to invest in improving the speed, performance, functionality, and personalization across our e-commerce platforms, with a particular focus on mobile. We also plan to expand our ship-from-store capabilities so that the majority of our retail stores can fulfill e-commerce orders which we expect to allow us to better meet customer demand and optimize sales, margins, and inventory productivity. We will also continue to test buy online pick up in store capabilities in 2018 in select stores which allows customers to reserve merchandise online and then purchase and pick-up their reserved items.
Optimizing the Store Fleet and Executing Our Outlet Strategy. We will continue to respond to the rapidly changing retail environment through store closures, conversions of retail stores to outlets, opening new outlet stores, and negotiating favorable store lease terms. We expect to grow our outlet store base over 25% in 2018 through the conversion of 28 retail stores to outlets and the opening of 10 net outlets in 2018. We plan to close 8 retail stores in 2018.
Effectively manage our cost base.
We expect to realize approximately $12 million dollars in cost savings in 2018 through our cost savings initiatives, with the majority benefiting merchandise margin through lower sourcing costs, and remain on track to deliver a total of $44 to $54 million dollars of annualized cost savings over the 2016 to 2019 period.
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, 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.
|
| | |
Financial Measures | Description | Discussion |
Net Sales | Revenue from the sale of merchandise, less returns and discounts, as well as shipping and handling revenue related to e-commerce, advertising revenue from the rental of our LED sign in Times Square, gift card breakage, and revenue earned from our franchise agreements. | 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 | 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 includes: • Sales from 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 during the year 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 that cannot open due to weather damage or other catastrophe | 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. |
|
| | |
Financial Measures | Description | Discussion |
Cost of goods sold, buying and occupancy costs | Includes the following: • Direct cost of purchased merchandise• Inventory shrink and other adjustments• Inbound and outbound freight• Merchandising, design, planning and allocation, and manufacturing/production costs• Occupancy costs related to store operations (such as rent and common area maintenance, utilities, and depreciation on assets)• Logistics costs associated with our e-commerce business
| 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; however, buying and occupancy costs related to e-commerce sales are variable and 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. |
Gross Profit/Gross Margin | 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. | Gross profit/gross margin is impacted by the price at which we are able to sell our merchandise and the direct cost of goods sold and 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 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 | 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 | 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. |
Fiscal Year Comparisons
Net Sales
|
| | | | | | | | | | | |
| Year Ended |
| 2017 | | 2016 | | 2015 |
Net sales (in thousands) | $ | 2,138,030 |
| | $ | 2,192,547 |
| | $ | 2,350,129 |
|
Comparable sales | (3 | )% | | (9 | )% | | 6 | % |
Comparable sales (excluding e-commerce sales) | (10 | )% | | (12 | )% | | 4 | % |
Gross square footage at end of period (in thousands) | 5,425 |
| | 5,662 |
| | 5,640 |
|
Number of: | | | | | |
Stores open at beginning of period | 656 |
| | 653 |
| | 641 |
|
New retail stores | — |
| | — |
| | 1 |
|
New outlet stores | 41 |
| | 23 |
| | 40 |
|
Retail stores converted to outlets | (24 | ) | | (4 | ) | | (2 | ) |
Closed stores | (38 | ) | | (16 | ) | | (27 | ) |
Stores open at end of period | 635 |
| | 656 |
| | 653 |
|
Net sales decreased by approximately $54.5 million, or 2%, between 2017 and 2016. The 53rd week contributed approximately $26 million to net sales. Comparable sales decreased 3% in 2017 compared to 2016. The decrease in comparable sales resulted primarily from a decrease in transactions and in-store average dollar sales per transaction. We attribute these reductions to decreased traffic at our stores, due in part to negative trends in overall mall traffic due to the shift in customer shopping patterns, and increased markdowns due to the promotional retail landscape. This was partially offset by an increase in e-commerce sales which resulted from the aforementioned shift in customer shopping patterns, an expanded assortment online, and our omni-channel initiatives, including ship-from-store. Non-comparable sales increased $21.1 million, driven primarily by new outlet store openings, partially offset by closed retail stores.
Net sales decreased by approximately $157.6 million, or 7%, between 2016 and 2015. Comparable sales decreased 9% in 2016 compared to 2015. The decrease in comparable sales resulted primarily from a decrease in transactions and in-store average dollar sales per transaction. We attribute these decreases to decreased traffic at our stores due in part to decreases in overall mall traffic, increased markdowns due to the promotional retail landscape, and a lack of fashion clarity in our product assortment, which offered too many choices and was overly targeted at the younger customers in our demographic in the first half of the year. This was partially offset by an increase in e-commerce sales which resulted from more targeted marketing as well as improvements to our website functionality and the online shopping experience. Non-comparable sales increased $37.5 million, driven primarily by new outlet store openings, and were partially offset by closed retail stores.
Gross Profit
The following table shows cost of goods sold, buying and occupancy costs, gross profit in dollars, and gross margin percentage for the stated periods:
|
| | | | | | | | | | | |
| Year Ended |
| 2017 | | 2016 | | 2015 |
| (in thousands, except percentages) |
Cost of goods sold, buying and occupancy costs | $ | 1,522,797 |
| | $ | 1,529,343 |
| | $ | 1,554,852 |
|
Gross profit | $ | 615,233 |
| | $ | 663,204 |
| | $ | 795,277 |
|
Gross margin percentage | 28.8 | % | | 30.2 | % | | 33.8 | % |
The 140 basis point decrease in gross margin percentage, or gross profit as a percentage of net sales, in 2017 compared to 2016 was comprised of a 70 basis point decrease in merchandise margin and a 70 basis point increase in buying and occupancy costs as a percentage of net sales. The decrease in merchandise margin was driven by a highly promotional retail environment partially offset by reductions in sourcing costs as part of our cost savings initiatives. The increase in buying and occupancy costs as a percentage of sales was primarily the result of the deleveraging effect of the decrease in sales.
The 360 basis point decrease in gross margin percentage, or gross profit as a percentage of net sales, in 2016 compared to 2015 was comprised of a 210 basis point decrease in merchandise margin and a 150 basis point increase in buying and occupancy costs as a percentage of net sales. The decrease in merchandise margin was driven by increased promotions, including increased markdowns on clearance items in the first half of the year. The increase in buying and occupancy costs as a percentage of sales was primarily the result of the deleveraging effect of the decrease in sales, increased rent expense, and a $5.1 million impairment charge related to leasehold improvements at certain underperforming stores in 2016 versus a $1.8 million impairment charge in 2015.
Selling, General, and Administrative Expenses
The following table shows selling, general, and administrative expenses in dollars and as a percentage of net sales for the stated periods:
|
| | | | | | | | | | | |
| Year Ended |
| 2017 | | 2016 | | 2015 |
| (in thousands) |
Selling, general, and administrative expenses | $ | 562,088 |
| | $ | 559,541 |
| | $ | 587,747 |
|
Selling, general, and administrative expenses, as a percentage of net sales | 26.3 | % | | 25.5 | % | | 25.0 | % |
The $2.5 million increase in selling, general, and administrative expenses in 2017 compared to 2016 was primarily the result of increased depreciation of $6.5 million related to new information technology systems and e-commerce technology partially offset by decreases in other operating costs, including supplies, taxes, and insurance.
The $28.2 million decrease in selling, general, and administrative expenses in 2016 compared to 2015 was primarily the result of decreased payroll related expenses of approximately $34.0 million. The reduction in payroll expenses was primarily related to decreases in incentive compensation and performance-based stock compensation resulting from decreased business performance. The decreases were partially offset by $7.8 million in additional depreciation primarily related to new information technology systems and e-commerce technology.
Restructuring Costs
The following table shows restructuring costs for the stated periods: |
| | | | | | | | | | | |
| Year Ended |
| 2017 | | 2016 | | 2015 |
| (in thousands, except percentages) |
Restructuring costs | $ | 22,869 |
| | $ | — |
| | $ | — |
|
Restructuring costs represent the costs incurred related to the exit of our Canadian business. These costs include a $6.5 million write-off of the investment in Express Canada, $5.5 million in impairment charges, $5.5 million in lease related expense, $4.2 million related to the write-off of the cumulative translation loss, and approximately $1.2 million in professional and other fees in 2017. Refer to Note 14 of the unaudited Consolidated Financial Statements for additional information regarding the exit of our Canadian business.
Interest Expense, Net
The following table shows interest expense in dollars for the stated periods:
|
| | | | | | | | | | | |
| Year Ended |
| 2017 | | 2016 | | 2015 |
| (in thousands) |
Interest expense, net | $ | 2,242 |
| | $ | 13,468 |
| | $ | 15,882 |
|
The $11.2 million decrease in interest expense in 2017 compared to 2016 was the result of the amortization of the debt discount related to the lease financing obligation associated with the amendment to our Times Square store lease agreement in the first quarter of 2016.
The $2.4 million decrease in interest expense in 2016 compared to 2015 is primarily related to a loss on extinguishment of debt in connection with the redemption of our 8 3/4% Senior Notes due 2018 (the "Senior Notes") in the first quarter of 2015, partially offset by the amortization of the debt discount related to the lease financing obligation associated with the amendment to our Times Square store lease agreement in the first quarter of 2016.
Income Tax Expense
The following table shows income tax expense in dollars for the stated periods:
|
| | | | | | | | | | | |
| Year Ended |
| 2017 | | 2016 | | 2015 |
| (in thousands) |
Income tax expense | $ | 8,669 |
| | $ | 33,200 |
| | $ | 74,171 |
|
The effective tax rate was 30.9% in 2017 compared to 36.6% in 2016. The effective tax rate for 2017 includes a net tax benefit of approximately $2.1 million attributable to certain discrete items, predominately related to the exit from Canada, executive compensation, and the impact of the U.S. tax law change described below.
On December 22, 2017, the TCJA was enacted into law. The TCJA will affect us through the reduction in the federal corporate income tax rate from 35% to 21% and the one-time re-measurement of our deferred taxes using this new lower tax rate. As a result of the reduction of the federal corporate income tax rate under TCJA, we remeasured our net deferred tax liabilities and recorded an income tax benefit of approximately $3.1 million in 2017. The provisional impact of the re-measurement of the our deferred taxes under TCJA was calculated considering all available information. The final impact of the TCJA may differ from this provisional amount due to the issuance of additional legislative guidance and further changes in interpretations and assumptions we have made in our calculations. The accounting is expected to be complete by the time the 2017 federal corporate income tax return is filed, but not later than one year from the enactment of TCJA.
We anticipate our effective tax rate will be approximately 28% in 2018, excluding the impact of share-based compensation or other discrete items which might occur.
The effective tax rate for 2016 was 36.6% compared to 38.9% for 2015. The effective tax rate for 2016 includes a net tax benefit of approximately $2.9 million attributable to certain discrete items that occurred during the third quarter of 2016.
Refer to Note 7 of the Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K for additional information regarding the tax rate.
Adjusted Net Income
The following table presents adjusted operating income, adjusted net income, and adjusted diluted earnings per share, each a non-GAAP financial measure, for the stated periods which eliminate certain non-core operating costs:
|
| | | | | | | | | | | | |
| Year Ended |
| 2017 | | 2016 | | 2015 | |
| (in thousands, except per share amounts) |
Operating Income | $ | 29,740 |
| | $ | 103,601 |
| | $ | 207,238 |
| |
Adjusted Operating Income | $ | 53,891 |
| | $ | 103,601 |
| * | $ | 207,238 |
| * |
Net Income | $ | 19,366 |
| | $ | 57,417 |
| | $ | 116,513 |
| |
Adjusted Net Income (Non-GAAP) | $ | 28,399 |
| | $ | 64,343 |
| | $ | 122,429 |
| |
Diluted Earnings Per Share | $ | 0.25 |
| | $ | 0.73 |
| | $ | 1.38 |
| |
Adjusted Diluted Earnings Per Share (Non-GAAP) | $ | 0.36 |
| | $ | 0.81 |
| | $ | 1.45 |
| |
* No adjustments were made to operating income for 2016 or 2015.
We supplement the reporting of our financial information determined under GAAP with certain non-GAAP financial measures: adjusted operating income, adjusted net income, and adjusted diluted earnings per share. We believe that these non-GAAP measures provide additional useful information to assist stockholders in understanding our financial results and assessing our prospects for future performance. Management believes adjusted operating income, adjusted net income, and adjusted diluted earnings per share are important indicators of our business performance because they exclude items that may not be indicative of, or are unrelated to, our underlying operating results, and provide a better baseline for analyzing trends in our business. In addition, adjusted operating income is used as a performance measure to determine short-term cash incentive compensation and adjusted diluted earnings per share is used as a performance measure in our executive compensation program for purposes of determining the payout of the
long-term incentive awards. Because non-GAAP financial measures are not standardized, it may not be possible to compare these financial measures with other companies' non-GAAP financial measures having the same or similar names. These adjusted financial measures should not be considered in isolation or as a substitute for reported operating income, net income, and reported diluted earnings per share. These non-GAAP financial measures reflect an additional way of viewing our operations that, when viewed with our GAAP results and the below reconciliations to the corresponding GAAP financial measures, provide a more complete understanding of our business. We strongly encourage investors and stockholders to review our financial statements and publicly-filed reports in their entirety and not to rely on any single financial measure.
The table below reconciles the non-GAAP financial measures, adjusted operating income, adjusted net income, and adjusted diluted earnings per share, with the most directly comparable GAAP financial measures, operating income, net income, and diluted earnings per share. No adjustments were made to operating income for 2016 or 2015, and therefore no tabular reconciliation has been included for these years.
|
| | | | | | | | | | | | | | |
| 2017 |
(in thousands, except per share amounts) | Operating Income | | Net Income | | Diluted Earnings per Share | | Weighted Average Diluted Shares Outstanding |
Reported GAAP Measure | $ | 29,740 |
| | $ | 19,366 |
| | $ | 0.25 |
| | 78,870 |
|
Impact of Canadian Exit | 24,151 |
| | 24,151 |
| | 0.31 |
| | |
Income Tax Benefit - Canadian Exit | — |
| | (12,067 | ) | | (0.15 | ) | | |
Impact of Tax Reform | — |
| | (3,051 | ) | | (0.04 | ) | | |
Adjusted Non-GAAP Measure | $ | 53,891 |
| | $ | 28,399 |
| | $ | 0.36 |
| | |
|
| | | | | | | | | | |
| 2016 |
(in thousands, except per share amounts) | Net Income | | Diluted Earnings per Share | | Weighted Average Diluted Shares Outstanding |
Reported GAAP Measure | $ | 57,417 |
| | $ | 0.73 |
| | 79,049 |
|
Interest Expense (a) | 11,354 |
| | 0.14 |
| | |
Income Tax Benefit (b) | (4,428 | ) | | (0.06 | ) | | |
Adjusted Non-GAAP Measure | $ | 64,343 |
| | $ | 0.81 |
| | |
| |
(a) | Represents non-core items related to the amendment of the Times Square Flagship store lease discussed in Note 5 of our Consolidated Financial Statements. |
| |
(b) | Items were tax affected at our statutory rate of approximately 39% for 2016. |
|
| | | | | | | | | | |
| 2015 |
(in thousands, except per share amounts) | Net Income | | Diluted Earnings per Share | | Weighted Average Diluted Shares Outstanding |
Reported GAAP Measure | $ | 116,513 |
| | $ | 1.38 |
| | 84,591 |
|
Interest Expense (a) | 9,657 |
| | 0.11 |
| | |
Income Tax Benefit (b) | (3,741 | ) | | (0.04 | ) | | |
Adjusted Non-GAAP Measure | $ | 122,429 |
| | $ | 1.45 |
| | |
| |
(a) | Includes the redemption premium paid, the write-off of unamortized debt issuance costs, and the write-off of the unamortized debt discount related to the redemption of all $200.9 million of our Senior Notes. |
| |
(b) | Items were tax affected at our statutory rate of approximately 39% for 2015. |
Liquidity and Capital Resources
A summary of cash provided by or used in operating, investing, and financing activities are shown in the following table:
|
| | | | | | | | | | | |
| Year Ended |
2017 | | 2016 | | 2015 |
| (in thousands) |
Provided by operating activities | $ | 118,567 |
| | $ | 186,708 |
| | $ | 229,603 |
|
Used in investing activities | (66,667 | ) | | (108,866 | ) | | (115,378 | ) |
Used in financing activities | (22,613 | ) | | (58,271 | ) | | (271,997 | ) |
Increase (decrease) in cash and cash equivalents | 28,849 |
| | 20,470 |
| | (159,256 | ) |
Cash and cash equivalents at end of period | $ | 236,222 |
| | $ | 207,373 |
| | $ | 186,903 |
|
Our business relies on cash flows from operations as our primary source of liquidity, with the majority of those cash flows being generated in the fourth quarter of the year. Our primary operating cash needs are for merchandise inventories, payroll, store rent, and marketing. Net cash provided by operating activities was $118.6 million in 2017 compared to $186.7 million in 2016. The decrease in operating cash flows in 2017 was primarily the result of the decreased performance of the business and the resulting decline in net income, the timing of real estate payments in the current year, as well as an increase in our inventory balance compared to the prior year due in part to the timing of inventory receipts. These were partially offset by the receipt of $20 million in 2017 in conjunction with the amendment to extend our private label credit card program agreement discussed in Note 15 of the Consolidated Financial Statements.
In addition to cash flow from operations, we have access to additional liquidity, if needed, through borrowings under our Revolving Credit Facility. As of February 3, 2018, we had $245.4 million available for borrowing under our Revolving Credit Facility. Refer to Note 8 of our Consolidated Financial Statements for additional information on our Revolving Credit Facility.
We also use cash for investing activities. Our capital expenditures consist primarily of new and remodeled store construction and fixtures and information technology projects. We had capital expenditures of approximately $57.4 million in 2017, $98.7 million in 2016, and $115.3 million in 2015. The decrease in 2017 was primarily driven by reduced capital expenditures related to remodels in 2017, as well as a reduction in information technology capital expenditures due to the completion of system upgrades in 2016. In addition to the capital expenditures, in 2017 we also incurred a cash loss upon the deconsolidation of Canada in the amount of $9.2 million, which represented the balance of the cash and cash equivalents in our Canadian subsidiary at the time of deconsolidation. In the second quarter of 2016, we also made a $10.1 million investment in Homage, LLC, a Columbus-based private apparel company.
In addition, we use cash for financing transactions. We repurchased $17.3 million, $51.5 million, and $68.6 million of common stock, including commissions, under share repurchase programs in 2017, 2016, and 2015, respectively. In 2015, we also redeemed all $200.9 million of our Senior Notes for an aggregate amount equal to $205.3 million, including the applicable redemption premium.
Our liquidity position benefits from the fact that we generally collect cash from sales to customers the same day or, in the case of credit or debit card transactions, within three to five days of the related sale, and have up to 75 days to pay certain merchandise vendors and 45 days to pay the majority of our non-merchandise vendors.
Forward-Looking Liquidity Discussion
In 2018, we plan to open approximately 38 factory outlet stores, 28 of which will be converted from existing retail locations. We expect capital expenditures for 2018 to be approximately $60 to $65 million, primarily driven by continued investment in information technology, remodels of existing high-performing stores, and new factory outlet store openings. These capital expenditures do not include the impact of landlord allowances, which are expected to be approximately $5 million for 2018. In addition, as part of our ongoing cost savings initiatives, we terminated our non-qualified retirement plan in 2017. As a result of this termination, during the first quarter of 2018, we expect to disburse the outstanding participant balances in this plan. As of February 3, 2018 the outstanding participant balances were $25.6 million. See Note 12 of our Consolidated Financial Statements for additional information.
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 and anticipated capital expenditures for at least the next 12 months.
Contractual Obligations
We enter into long-term contractual obligations and commitments in the normal course of business. As of February 3, 2018, our contractual future cash obligations are set forth in the following table.
|
| | | | | | | | | | | | | | | |
| Payments Due by Period |
Contractual Obligations: | Total | <1 Year | 1-3 Years | 3-5 Years | Thereafter |
| (in thousands) |
Operating Leases(1) | 1,320,562 |
| 229,896 |
| 377,923 |
| 306,989 |
| 405,754 |
|
Purchase Obligations(2) | 316,064 |
| 316,064 |
| — |
| — |
| — |
|
Other Long-Term Obligations(3) | 29,860 |
| 11,547 |
| 17,403 |
| 910 |
| — |
|
Total | $ | 1,666,486 |
| $ | 557,507 |
| $ | 395,326 |
| $ | 307,899 |
| $ | 405,754 |
|
| |
(1) | We enter into operating leases in the normal course of business. Most lease arrangements provide us with the option to renew the leases at defined terms. The future operating lease obligations would change if we were to exercise these options, or if we were to enter into additional operating leases. These amounts also include all contractual lease commitments related to our flagship locations, which we are considered the owner of for accounting purposes. Common area maintenance, real estate tax, and other customary charges included in our operating lease agreements are not included above. Estimated annual expense for such charges is approximately $119 million. |
| |
(2) | Purchase obligations are made up of merchandise purchase orders and unreserved fabric commitments. |
| |
(3) | Other long-term obligations consist of employment related agreements and obligations under other long-term agreements. |
Critical Accounting Estimates
The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of our assets, liabilities, revenues, and expenses, as well as the related disclosure of contingent assets and liabilities at the date of the financial statements. Management evaluates its accounting policies, estimates, and judgments on an on-going basis. Management bases its estimates and judgments on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions and conditions.
Management evaluated the development and selection of its critical accounting policies and estimates and believes that the following policies involve a higher degree of judgment or complexity and are most significant to reporting our results of operations and financial position and are, therefore, discussed as critical. The following critical accounting policies reflect the significant estimates and judgments used in the preparation of our Consolidated Financial Statements. More information on all of our significant accounting policies can be found in Note 2 to our Consolidated Financial Statements.
|
| | |
Description of Policy | Judgments and Uncertainties | Effect if Actual Results Differ from Assumptions |
Gift Card Breakage | | |
We sell gift cards in our retail stores and through our e-commerce website and third parties. These cards do not expire or lose value over periods of inactivity. We account for gift cards by recognizing a liability at the time a gift card is sold. We recognize income from gift cards when they are redeemed by the customer. In addition, income on unredeemed gift cards is recognized proportionally using a time-based attribution method from issuance of the gift card to the time it can be determined that the likelihood of the gift card being redeemed is remote. The gift card breakage rate is based on historical redemption patterns.
We have not made any material changes in the accounting methodology used to determine gift card breakage over the past three years. | Our accounting methodology for calculating gift card breakage contains uncertainties because it requires management to make assumptions that future gift card redemptions will follow the pattern of previous redemptions. Our estimates for these items are based primarily on historical transaction experience. | We have no reason to believe that there will be a material change in the future estimates or assumptions we use to measure gift card breakage. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to losses or gains that could be material.
A 100 basis point change in our gift card breakage rate as of February 3, 2018 would not have had a material impact on pre-tax income. |
Returns Reserve | | |
We recognize retail sales at the time the customer takes possession of the merchandise. We reserve for sales returns through estimates based on historical experience and various other assumptions that management believes to be reasonable.
We have not made any material changes in the accounting methodology used to determine our returns reserve over the past three years. | Our accounting methodology for estimating our returns reserve contains uncertainties because it requires management to make assumptions that merchandise returns in the future will follow the pattern of returns in prior periods. Our estimates for these items are based primarily on historical transaction experience. | We have no reason to believe that there will be a material change in the future estimates or assumptions we use to measure our returns reserve. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to losses or gains that could be material.
A 100 basis point change in the rate of returns as of February 3, 2018 would not have had a material impact on pre-tax income. |
|
| | |
Description of Policy | Judgments and Uncertainties | Effect if Actual Results Differ from Assumptions |
Inventories - Lower of Cost or Net Realizable Value | | |
Inventories are principally valued at the lower of cost or net realizable value on a weighted-average cost basis. We record a lower of cost or net realizable value adjustment for our inventories if the cost of specific inventory items on hand exceeds the amount we expect to realize from the ultimate sale or disposal of the inventory.
We have not made any material changes in the accounting methodology used to determine the lower of cost or net realizable value adjustment over the past three years. | Our accounting methodology for determining the lower of cost or net realizable value adjustment contains uncertainties because it requires management to make assumptions and estimates that are based on factors such as merchandise seasonality, historical trends, and estimated inventory levels, including sell-through of remaining units. | We have no reason to believe that there will be a material change in the future estimates or assumptions we use to measure the lower of cost or net realizable value adjustment. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to losses or gains that could be material.
A 10% increase or decrease in the lower of cost or net realizable value adjustment would not have had a material impact on the inventory balance or pre-tax income as of and for the year ended February 3, 2018. |
Intangible Assets | | |
Intangible assets with indefinite lives, primarily tradenames, are reviewed for impairment annually in the fourth quarter and may be reviewed more frequently if indicators of impairment are present. The impairment review is performed by assessing qualitative factors to determine whether it is more likely than not that the fair value of the asset is less than its carrying amount. | Our consideration of indefinite lived intangible assets for impairment requires judgments surrounding future operating performance, economic conditions, and business plans, among other factors. | There are inherent uncertainties related to our assessment and, if actual results are not consistent with our estimates or assumptions, we may be exposed to impairment losses that could be material.
|
Leasehold Improvements | | |
Leasehold improvements are reviewed for impairment if indicators of impairment are present. The impairment review is performed at the store level by comparing the carrying value of the asset to the undiscounted cash flows derived from the asset group. If the undiscounted cash flows of the asset are less than the carrying value of the respective asset group, then the carrying value is compared to the estimated fair value as determined using the discounted store cash flows, and a loss is recognized for the difference.
We have not made any material changes in the triggering events used to evaluate our leasehold improvements for impairment over the past three years. | Our analysis of leasehold improvements for impairment requires judgment surrounding identification of appropriate triggering events. This judgment can be affected by factors such as expectations for future store performance, real estate demand, and economic conditions that can be difficult to predict. | We have no reason to believe that there will be a material change in the future estimates or assumptions we use in this evaluation. However, if we become aware of additional triggering events there is potential that additional stores could be required to be tested for impairment and could be impaired. |
|
| | |
Description of Policy | Judgments and Uncertainties | Effect if Actual Results Differ from Assumptions |
Claims and Contingencies | | |
We are subject to various claims and contingencies related to legal, regulatory, and other matters arising out of the normal course of business. Our determination of the treatment of claims and contingencies in our Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K is based on management's view of the expected outcome of the applicable claim or contingency. Management may also use outside legal advice on matters related to litigation to assist in the estimating process.
We accrue a liability if the likelihood of an adverse outcome is probable and the amount is reasonably estimable. We re-evaluate these assessments on a quarterly basis or as new material information becomes available to determine whether a liability should be established or if any existing liability should be adjusted.
We have not made any material changes in the accounting methodology used to establish our liability for claims and contingencies over the past three years. | Our liability for claims and contingencies contains uncertainties because the eventual outcome will result from future events. Additionally, the determination of current accruals requires estimates and judgments related to known and unknown facts and circumstances, differing interpretations of the law, assessments of the amount of damages, and the effectiveness of strategies and other factors beyond our control. | We have no reason to believe that there will be a material change in our accrual or the assumptions we use to establish the accrual for claims and contingencies. However, if actual results are not consistent with our estimates or expectations of the eventual outcomes of cases, we may be exposed to gains or losses that could be material and our cash flow could be materially impacted. |
Income Taxes | | |
We account for income taxes using the asset and liability method. Under this method, the amount of taxes currently payable or refundable is accrued. | Our accounting methodology for calculating our tax liabilities contains uncertainties because our judgments may change as a result of evaluation of new information not previously available. | We have no reason to believe that there will be a material change in our tax related balances. However, due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from the current estimate of our tax liabilities. |
Deferred Taxes | | |
Deferred tax assets and liabilities are recognized for the estimated future tax consequences of temporary differences that currently exist between the tax basis and the financial reporting basis of our assets and liabilities. Deferred tax assets and liabilities are measured using the enacted tax rates in effect in the years when those temporary differences are expected to reverse. The effect on deferred taxes from a change in tax rate is recognized in earnings in the period that includes the enactment date of the change. | Our deferred tax asset and liability balances contain uncertainty because changes in tax laws, rates, or future taxable income may differ from estimates and judgments made by management. | We have no reason to believe that our results of operations will differ materially from our current expectations. However, if future tax rates are changed or if actual results are not consistent with our estimates, we may need to adjust the carrying value of our deferred tax balances. An increase or decrease in the valuation allowance would result in a respective increase or decrease in our effective tax rate in the period the increase occurs. |
|
| | |
Description of Policy | Judgments and Uncertainties | Effect if Actual Results Differ from Assumptions |
Uncertain Tax Positions | | |
Uncertain tax positions arise from the fact that we may be subject to periodic audits by the Internal Revenue Service and other taxing authorities. | Internal Revenue Service audits may challenge certain of our tax positions, such as the timing and amount of deductions and allocation of taxable income to various jurisdictions. | To the extent that we prevail in matters for which unrecognized tax benefit liabilities have been established or are required to pay amounts in excess of recorded unrecognized tax benefit liabilities, our effective tax rate in a given financial statement period could be materially affected. An unfavorable tax settlement would require use of our cash and result in an increase in our effective tax rate in the period of resolution. A favorable tax settlement would be recognized as a reduction in our effective tax rate in the period of resolution. |
Recently Issued Accounting Pronouncements
Recently issued accounting pronouncements and their estimated effect on the Company’s consolidated financial statements are described in Note 1 of our Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
Our Revolving Credit Facility bears interest at variable rates. See Note 8 to our Consolidated Financial Statements for further information on the calculation of the rates. We did not borrow any amounts under our Revolving Credit Facility during 2017. Changes in interest rates are not expected to have a material impact on our future earnings or cash flows given our limited exposure to such changes.
Impact of Inflation
Inflationary factors such as increases in the cost of our products and operations may adversely affect our operating results. Although we do not believe that inflation has had a material impact on our financial position or results of operations to date, a high rate of inflation in the future may have an adverse effect on our ability to maintain current levels of gross profit and selling, general, and administrative expenses as a percentage of net sales if the selling prices of our products do not rise with these increased costs.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Express, Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Express, Inc. and its subsidiaries as of February 3, 2018 and January 28, 2017, and the related consolidated statements of income and comprehensive income, of changes in stockholders’ equity and of cash flows for each of the three years in the period ended February 3, 2018, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of February 3, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of February 3, 2018 and January 28, 2017, and the results of their operations and their cash flows for each of the three years in the period ended February 3, 2018 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of February 3, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Columbus, Ohio
April 4, 2018
We have served as the Company’s auditor since 2008.
EXPRESS, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in Thousands, Except Per Share Amounts)
|
| | | | | | | |
| February 3, 2018 | | January 28, 2017 |
ASSETS | | | |
CURRENT ASSETS: | | | |
Cash and cash equivalents | $ | 236,222 |
| | $ | 207,373 |
|
Receivables, net | 12,084 |
| | 15,787 |
|
Inventories | 266,271 |
| | 241,424 |
|
Prepaid minimum rent | 30,779 |
| | 31,626 |
|
Other | 19,780 |
| | 17,923 |
|
Total current assets | 565,136 |
| | 514,133 |
|
| | | |
PROPERTY AND EQUIPMENT | 1,047,447 |
| | 1,029,176 |
|
Less: accumulated depreciation | (642,434 | ) | | (577,890 | ) |
Property and equipment, net | 405,013 |
| | 451,286 |
|
| | | |
TRADENAME/DOMAIN NAMES/TRADEMARKS | 197,618 |
| | 197,618 |
|
DEFERRED TAX ASSETS | 7,025 |
| | 7,926 |
|
OTHER ASSETS | 12,815 |
| | 14,226 |
|
Total assets | $ | 1,187,607 |
| | $ | 1,185,189 |
|
| | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
CURRENT LIABILITIES: | | | |
Accounts payable | $ | 145,589 |
| | $ | 172,668 |
|
Deferred revenue | 28,920 |
| | 29,428 |
|
Accrued expenses | 116,355 |
| | 80,301 |
|
Total current liabilities | 290,864 |
| | 282,397 |
|
| | | |
DEFERRED LEASE CREDITS | 137,618 |
| | 146,328 |
|
OTHER LONG-TERM LIABILITIES | 105,125 |
| | 120,777 |
|
Total liabilities | 533,607 |
| | 549,502 |
|
| | | |
COMMITMENTS AND CONTINGENCIES (Note 13) |
| |
|
| | | |
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; 92,647 shares and 92,063 shares issued at February 3, 2018 and January 28, 2017, respectively, and 76,724 shares and 78,422 shares outstanding at February 3, 2018 and January 28, 2017, respectively | 926 |
| | 921 |
|
Additional paid-in capital | 199,099 |
| | 185,097 |
|
Accumulated other comprehensive loss | — |
| | (3,803 | ) |
Retained earnings | 710,081 |
| | 690,715 |
|
Treasury stock – at average cost; 15,923 shares and 13,641 shares at February 3, 2018 and January 28, 2017, respectively | (256,106 | ) | | (237,243 | ) |
Total stockholders’ equity | 654,000 |
| | 635,687 |
|
Total liabilities and stockholders’ equity | $ | 1,187,607 |
| | $ | 1,185,189 |
|
See notes to consolidated financial statements.
EXPRESS, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Amounts in Thousands, Except Per Share Amounts)
|
| | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
NET SALES | $ | 2,138,030 |
|
| $ | 2,192,547 |
|
| $ | 2,350,129 |
|
COST OF GOODS SOLD, BUYING AND OCCUPANCY COSTS | 1,522,797 |
|
| 1,529,343 |
|
| 1,554,852 |
|
Gross profit | 615,233 |
|
| 663,204 |
|
| 795,277 |
|
OPERATING EXPENSES: |
|
|
|
|
|
Selling, general, and administrative expenses | 562,088 |
|
| 559,541 |
|
| 587,747 |
|
Restructuring costs | 22,869 |
| | — |
| | — |
|
Other operating expense, net | 536 |
|
| 62 |
|
| 292 |
|
Total operating expenses | 585,493 |
|
| 559,603 |
|
| 588,039 |
|
|
|
|
|
|
|
OPERATING INCOME | 29,740 |
|
| 103,601 |
|
| 207,238 |
|
|
|
|
|
|
|
INTEREST EXPENSE, NET | 2,242 |
|
| 13,468 |
|
| 15,882 |
|
OTHER (INCOME) EXPENSE, NET | (537 | ) |
| (484 | ) |
| 672 |
|
INCOME BEFORE INCOME TAXES | 28,035 |
|
| 90,617 |
|
| 190,684 |
|
INCOME TAX EXPENSE | 8,669 |
|
| 33,200 |
|
| 74,171 |
|
NET INCOME | $ | 19,366 |
|
| $ | 57,417 |
|
| $ | 116,513 |
|
|
|
|
|
|
|
OTHER COMPREHENSIVE INCOME: |
|
|
|
|
|
Foreign currency translation gain (loss) | $ | (402 | ) |
| $ | 862 |
|
| $ | (1,608 | ) |
Amount reclassified to earnings | 4,205 |
| | — |
| | — |
|
COMPREHENSIVE INCOME | $ | 23,169 |
|
| $ | 58,279 |
|
| $ | 114,905 |
|
| | | | | |
EARNINGS PER SHARE: |
|
|
|
|
|
Basic | $ | 0.25 |
|
| $ | 0.73 |
|
| $ | 1.39 |
|
Diluted | $ | 0.25 |
|
| $ | 0.73 |
|
| $ | 1.38 |
|
|
|
|
|
|
|
WEIGHTED AVERAGE SHARES OUTSTANDING: |
|
|
|
|
|
Basic | 78,592 |
|
| 78,669 |
|
| 83,980 |
|
Diluted | 78,870 |
|
| 79,049 |
|
| 84,591 |
|
See notes to consolidated financial statements.
EXPRESS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Amounts in Thousands)
|
| | | | | | | | | | | | | | | | | | | | | | |
| 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 31, 2015 | 84,298 |
| $ | 904 |
| $ | 149,789 |
| $ | 516,785 |
| $ | (3,057 | ) | 6,102 |
| $ | (108,082 | ) | $ | 556,339 |
|
Net income | — |
| — |
| — |
| 116,513 |
| — |
| — |
| — |
| 116,513 |
|
Issuance of common stock | 727 |
| 7 |
| 1,269 |
| — |
| — |
| — |
| — |
| 1,276 |
|
Share-based compensation | — |
| — |
| 18,457 |
| — |
| — |
| — |
| — |
| 18,457 |
|
Repurchase of common stock | (4,111 | ) | — |
| — |
| — |
| — |
| 4,111 |
| (73,024 | ) | (73,024 | ) |
Foreign currency translation | — |
| — |
| — |
| — |
| (1,608 | ) | — |
| — |
| (1,608 | ) |
BALANCE, January 30, 2016 | 80,914 |
| $ | 911 |
| $ | 169,515 |
| $ | 633,298 |
| $ | (4,665 | ) | 10,213 |
| $ | (181,106 | ) | $ | 617,953 |
|
Net income | — |
| — |
| — |
| 57,417 |
| — |
| — |
| — |
| 57,417 |
|
Issuance of common stock | 936 |
| 10 |
| 2,724 |
| — |
| — |
| — |
| — |
| 2,734 |
|
Share-based compensation | — |
| — |
| 12,858 |
| — |
| — |
| — |
| — |
| 12,858 |
|
Repurchase of common stock | (3,428 | ) | — |
| — |
| — |
| — |
| 3,428 |
| (56,137 | ) | (56,137 | ) |
Foreign currency translation | — |
| — |
| — |
| — |
| 862 |
| — |
| — |
| 862 |
|
BALANCE, January 28, 2017 | 78,422 |
| $ | 921 |
| $ | 185,097 |
| $ | 690,715 |
| $ | (3,803 | ) | 13,641 |
| $ | (237,243 | ) | $ | 635,687 |
|
Net income | — |
| — |
| — |
| 19,366 |
| — |
| — |
| — |
| 19,366 |
|
Issuance of common stock | 584 |
| 5 |
| (6 | ) | — |
| — |
| — |
| — |
| (1 | ) |
Share-based compensation | — |
| — |
| 14,008 |
| — |
| — |
| — |
| — |
| 14,008 |
|
Repurchase of common stock | (2,282 | ) | — |
| — |
| — |
| — |
| 2,282 |
| (18,863 | ) | (18,863 | ) |
Foreign currency translation | — |
| — |
| — |
| — |
| (402 | ) | — |
| — |
| (402 | ) |
Amount reclassified to earnings | — |
| — |
| — |
| — |
| 4,205 |
| — |
| — |
| 4,205 |
|
BALANCE, February 3, 2018 | 76,724 |
| $ | 926 |
| $ | 199,099 |
| $ | 710,081 |
| $ | — |
| 15,923 |
| $ | (256,106 | ) | $ | 654,000 |
|
See notes to consolidated financial statements.
EXPRESS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in Thousands)
|
| | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | |
Net income | $ | 19,366 |
|
| $ | 57,417 |
| | $ | 116,513 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | |
| | | |
Depreciation and amortization | 90,221 |
|
| 82,144 |
| | 74,904 |
|
Loss on disposal of property and equipment | 2,891 |
|
| 942 |
| | 1,561 |
|
Impairment charge | 9,850 |
| | 5,108 |
| | 2,657 |
|
Loss on deconsolidation of Canada | 10,672 |
| | — |
| | — |
|
Amortization of lease financing obligation discount | — |
| | 11,354 |
| | — |
|
Excess tax benefit from share-based compensation | — |
|
| — |
| | (347 | ) |
Share-based compensation | 14,008 |
|
| 12,858 |
| | 18,438 |
|
Non-cash loss on extinguishment of debt | — |
|
| — |
| | 5,314 |
|
Deferred taxes | (912 | ) |
| 20,065 |
| | (10,700 | ) |
Landlord allowance amortization | (13,183 | ) | | (11,280 | ) | | (12,730 | ) |
Other non-cash adjustments | (500 | ) | | — |
| | — |
|
Payment of original issue discount | — |
| | — |
| | (2,812 | ) |
Changes in operating assets and liabilities: | |
| | | |
Receivables, net | 3,279 |
|
| 6,371 |
| | 1,097 |
|
Inventories | (28,954 | ) |
| 14,144 |
| | (14,625 | ) |
Accounts payable, deferred revenue, and accrued expenses | (12,862 | ) |
| (15,857 | ) | | 17,705 |
|
Other assets and liabilities | 24,691 |
|
| 3,442 |
| | 32,628 |
|
Net cash provided by operating activities | 118,567 |
|
| 186,708 |
| | 229,603 |
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
| | |
Capital expenditures | (57,435 | ) |
| (98,712 | ) | | (115,343 | ) |
Decrease in cash and cash equivalents resulting from deconsolidation of Canada | (9,232 | ) | | — |
| | — |
|
Purchase of intangible assets | — |
|
| (21 | ) | | (35 | ) |
Investment in equity interests | — |
| | (10,133 | ) | | — |
|
Net cash used in investing activities | (66,667 | ) |
| (108,866 | ) | | (115,378 | ) |
CASH FLOWS FROM FINANCING ACTIVITIES: | |
|
| | |
Repayment of long-term debt | — |
|
| — |
| | (198,038 | ) |
Costs incurred in connection with debt arrangements | — |
|
| — |
| | (1,006 | ) |
Payments on lease financing obligations | (1,710 | ) |
| (1,595 | ) | | (1,552 | ) |
Repayments of financing arrangements | (2,040 | ) | | (3,274 | ) | | — |
|
Excess tax benefit from share-based compensation | — |
|
| — |
| | 347 |
|
Proceeds from exercise of stock options | — |
|
| 2,735 |
| | 1,276 |
|
Repurchase of common stock under share repurchase programs (see Note 9) | (17,264 | ) | | (51,538 | ) | | (68,574 | ) |
Repurchase of common stock for tax withholding obligations | (1,599 | ) |
| (4,599 | ) | | (4,450 | ) |
Net cash used in financing activities | (22,613 | ) |
| (58,271 | ) | | (271,997 | ) |
|
|
|
|
|
| | |
EFFECT OF EXCHANGE RATE ON CASH | (438 | ) |
| 899 |
| | (1,484 | ) |
|
|
|
|
|
| | |
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 28,849 |
| | 20,470 |
| | (159,256 | ) |
CASH AND CASH EQUIVALENTS, Beginning of period | 207,373 |
|
| 186,903 |
| | 346,159 |
|
CASH AND CASH EQUIVALENTS, End of period | $ | 236,222 |
|
| $ | 207,373 |
| | $ | 186,903 |
|
| | | | | |
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | | | | | |
Cash paid for interest | $ | — |
| | $ | — |
| | $ | 8,787 |
|
Cash paid to taxing authorities | $ | 6,142 |
| | $ | 40,413 |
| | $ | 71,686 |
|
See notes to consolidated financial statements.
Notes to Consolidated Financial Statements
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 and factory outlet stores and the Company's e-commerce website, www.express.com, as well as its mobile app. As of February 3, 2018, Express operated 490 primarily mall-based retail stores in the United States and Puerto Rico as well as 145 factory outlet stores. Additionally, the Company earned revenue from 17 franchise stores in Latin America. These franchise stores are operated by franchisees pursuant to franchise agreements. Under the franchise agreements, the franchisees operate stand-alone Express stores that sell Express-branded apparel and accessories purchased directly from the Company.
On May 4, 2017, Express announced its intention to exit the Canadian market and Express Fashion Apparel Canada Inc. and one of its wholly-owned subsidiaries filed for protection in Canada under the Companies' Creditors Arrangement Act (CCAA) with the Ontario Superior Court of Justice in Toronto. As of May 4, 2017, Canadian retail operations were deconsolidated from the Company's financial statements. Canadian financial results prior to May 4, 2017 are included in the Company's consolidated financial statements. See Note 14 for additional information.
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 "2017" represent the 53-week period ended February 3, 2018 and "2016," and "2015" represent the 52-week periods ended January 28, 2017, and January 30, 2016, respectively.
Basis of Presentation
Express, Inc., a holding company, owns all of the outstanding equity interests in Express Topco LLC, a holding company, which owns all of the outstanding equity interests in Express Holding, LLC ("Express Holding"). Express Holding owns all of the outstanding equity interests in Express, LLC. Express, LLC, together with its subsidiaries, including Express Fashion Operations, LLC, conducts the operations of the Company. Express, LLC was a division of L Brands, Inc. until it was acquired by Golden Gate Capital in 2007.
Principles of Consolidation
The Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.
Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update No. 2014-09, "Revenue from Contracts with Customers (Topic 606)." ("ASC 606"). ASC 606 supersedes the revenue recognition requirements in "Revenue Recognition (Topic 605)", and requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. The Company adopted ASC 606 in the first quarter of fiscal 2018 under the full retrospective method. The primary impact of ASC 606 relates to the accounting for points earned under the Company's customer loyalty program, the timing of revenue recognition for e-commerce sales, and the classification on the income statement of funds received and certain costs incurred related to our private label credit card program. These changes will not have a material effect on the Company's historical financial position and are not expected to have a material effect on the Company's financial position in 2018; however, there are enhanced disclosure requirements under this standard.
In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)." ASU 2016-02 requires entities to recognize lease assets and lease liabilities on the balance sheet and to disclose key information about leasing arrangements. Under ASU 2016-02, a lessee should recognize a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term on its balance sheet. The new standard is effective for annual and interim periods beginning after December 15, 2018. ASU 2016-02 mandates a modified retrospective transition method with early adoption permitted. The Company continues to evaluate the impact that adopting ASU 2016-02 will have on its consolidated financial statements, but the most significant impact will be to increase assets and liabilities on the consolidated balance sheet by the present value of the Company's leasing obligations, which are primarily related to store leases, as well as additional disclosures required.
2. Summary of Significant Accounting Policies
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 revenue and expense 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.
Cash and Cash Equivalents
Cash and cash equivalents include investments in money market funds, commercial paper with a maturity at the time of purchase of less than 90 days, payments due from banks for third-party credit and debit card transactions for up to five days of sales, cash on hand, and deposits with financial institutions. As of February 3, 2018 and January 28, 2017, amounts due from banks for credit and debit card transactions totaled approximately $11.3 million and $10.2 million, respectively.
Outstanding checks not yet presented for payment amounted to $9.1 million and $49.8 million as of February 3, 2018 and January 28, 2017, respectively, and are included in accounts payable on the Consolidated Balance Sheets.
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
The following table presents the Company's financial assets measured at fair value on a recurring basis as of February 3, 2018 and January 28, 2017, aggregated by the level in the fair value hierarchy within which those measurements fall.
|
| | | | | | | | | |
| February 3, 2018 |
| Level 1 | Level 2 | Level 3 |
| (in thousands) |
Money market funds | $ | 139,920 |
| $ | — |
| $ | — |
|
Commercial paper | — |
| 79,908 |
| |
| $ | 139,920 |
| $ | 79,908 |
| $ | — |
|
| |
| January 28, 2017 |
| Level 1 | Level 2 | Level 3 |
| (in thousands) |
Money market funds | $ | 177,551 |
| $ | — |
| $ | — |
|
The money market funds are valued using quoted market prices in active markets. The commercial paper is valued using other observable inputs for those securities based on information provided by an independent third party entity.
Non-Financial Assets
The Company's non-financial assets, which include fixtures, equipment, improvements, and intangible assets, are not required to be measured at fair value on a recurring basis. However, the Company tests for impairment 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. See additional discussion under the heading "Property and Equipment, Net" in this note below.
The carrying amounts reflected on the Consolidated Balance Sheets for cash, cash equivalents, receivables, prepaid expenses, and payables as of February 3, 2018 and January 28, 2017 approximated their fair values.
Receivables, Net
Receivables, net consist primarily of construction allowances, receivables from our franchisees and third-party resellers of our gift cards, and other miscellaneous receivables. Outstanding receivables are continuously reviewed for collectability. The Company's allowance for doubtful accounts was not significant as of February 3, 2018 or January 28, 2017.
Inventories
Inventories are principally valued at the lower of cost or net realizable value on a weighted-average cost basis. The Company writes down inventory, the impact of which is reflected in cost of goods sold, buying and occupancy costs in the Consolidated Statements of Income and Comprehensive Income, if the cost of specific inventory items on hand exceeds the amount the Company expects to realize from the ultimate sale or disposal of the inventory. These estimates are based on management's judgment regarding future demand and market conditions and analysis of historical experience. The lower of cost or net realizable value adjustment to inventory as of February 3, 2018 and January 28, 2017 was $12.1 million and $12.4 million, respectively.
The Company also records an inventory shrink reserve for estimated merchandise inventory losses between the last physical inventory count and the balance sheet date. This estimate is based on management's analysis of historical results.
Advertising
Advertising production costs are expensed at the time the promotion first appears in media, stores, or on the website. Total advertising expense totaled $112.8 million, $113.2 million, and $110.5 million in 2017, 2016, and 2015, respectively. Advertising costs are included in selling, general, and administrative expenses in the Consolidated Statements of Income and Comprehensive Income.
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 for purchases at the Company's U.S. stores or on its website. Generally, rewards earned must be redeemed within 60 days from the date of issuance. The Company accrues for the anticipated costs related to redemptions of the certificates as points are earned. To calculate this expense, the Company estimates margin rates and makes assumptions related to card holder redemption rates, which are both based on historical experience. This expense is included within cost of goods sold, buying and occupancy costs in the Consolidated Statements of Income and Comprehensive Income. The loyalty liability is included in accrued expenses on the Consolidated Balance Sheets.
Property and Equipment, Net
Property and equipment are stated at cost. Depreciation of property and equipment is computed on a straight-line basis, using the following useful lives:
|
| |
Category | Depreciable Life |
Software, including software developed for internal use | 3 - 7 years |
Store related assets and other property and equipment | 3 - 10 years |
Furniture, fixtures and equipment | 5 - 7 years |
Leasehold improvements | Shorter of lease term or useful life of the asset, typically no longer than 15 years |
Building improvements | 6 - 30 years |
When a decision is made to dispose of property and equipment prior to the end of its previously estimated useful life, depreciation estimates are revised to reflect the use of the asset over the shortened estimated useful life. The cost of assets sold or retired and the related accumulated depreciation are removed from the accounts with any resulting gain or loss included in other operating expense (income), net, in the Consolidated Statements of Income and Comprehensive Income. Maintenance and repairs are charged to expense as incurred. Major renewals and betterments that extend useful lives are capitalized.
Property and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. The reviews are conducted at the store level, the lowest identifiable level of cash flow. The impairment test requires the Company to estimate the fair value of the assets and compare this to their carrying value. If the fair value of the assets are less than the carrying value, then an impairment charge is recognized and the non-financial assets are recorded at fair value. The Company estimates the fair value using a discounted cash flow model. Factors used in the evaluation include, but are not limited to, management's plans for future operations, recent operating results, and projected cash flows. In 2017, as a result of decreased performance in certain stores, the Company recognized impairment charges of $4.4 million related to 12 stores. In addition, during 2017, the Company recognized $5.5 million related to its 17 Canadian stores, all of which were fully impaired and are now closed. In 2016, the Company recognized impairment charges of $5.1 million related to 11 stores. In 2015, the Company recognized impairment charges of $1.8 million related to 4 stores. With the exception of the Canadian impairment, impairment charges are recorded in cost of goods sold, buying, and occupancy costs in the Consolidated Statements of Income and Comprehensive Income. The Canadian impairment was recorded in restructuring costs in the Consolidated Statements of Income and Comprehensive Income. See Note 14 for further discussion of the exit of the Canadian operations.
Intangible Assets
The Company has intangible assets, which consist primarily of the Express and related tradenames and its Internet domain names. Intangible assets with indefinite lives are reviewed for impairment annually in the fourth quarter and may be reviewed more frequently if indicators of impairment are present. The impairment review is performed by assessing quantitative and/or qualitative factors to determine whether it is more likely than not that the fair value of the asset is less than its carrying amount. The consideration of indefinite lived intangible assets for impairment requires judgments surrounding future operating performance, economic conditions, and business plans, among other factors.
The Company did not incur any impairment charges on indefinite lived intangible assets in 2017, 2016, or 2015.
Investment in Equity Interests
In the second quarter of 2016, the Company made a $10.1 million investment in Homage, LLC, a privately held retail company based in Columbus, Ohio. The non-controlling investment in the entity is being accounted for under the equity method. Under the terms of the agreement governing the investment, the Company's investment was increased by $0.5 million during the second quarter of 2017 as the result of an accrual of a non-cash preferred yield. The total $10.6 million investment is included in other assets on the Consolidated Balance Sheets.
Leases and Landlord Allowances
The Company has leases that contain pre-determined fixed escalations of minimum rentals and/or rent abatements subsequent to taking possession of the leased property. The rent expense is recognized on a straight-line basis commencing upon possession date. The Company records the difference between the recognized rent expense and amounts payable under the leases as deferred lease credits. The Company also has leases that contain contingent rent provisions, such as overage rent. For these leases, the Company records a contingent rent liability in accrued expenses on the Consolidated Balance Sheets and the corresponding rent expense in cost of goods sold, buying and occupancy costs in the Consolidated Statements of Income and Comprehensive Income when specified financial levels have been achieved or when management determines that achieving the specified financial levels during the year is probable.
The Company receives allowances for leasehold improvements from landlords related to its stores. These allowances are generally comprised of cash amounts received from landlords as part of negotiated lease terms. The Company records a receivable and a landlord allowance upon execution of the corresponding lease. The landlord allowance is recorded as a deferred lease credit on the Consolidated Balance Sheets. The landlord allowance is amortized on a straight-line basis as a reduction of rent expense over the term of the lease, including the pre-opening build-out period. The receivable is reduced as allowance amounts are received from landlords.
Income Taxes
The Company accounts for income taxes using the asset and liability method. Under this method, the amount of taxes currently payable or refundable are accrued, and deferred tax assets and liabilities are recognized for the estimated future tax consequences of temporary differences that currently exist between the tax basis and financial reporting basis of the Company's assets and liabilities. Valuation allowances are established against deferred tax assets when it is more likely than not that the realization of those deferred tax assets will not occur.
Deferred tax assets and liabilities are measured using the enacted tax rates in effect in the years when those temporary differences are expected to reverse. The effect on deferred taxes from a change in tax rate is recognized through continuing operations in the period that includes the enactment date of the change. Changes in tax laws and rates could affect recorded deferred tax assets and liabilities in the future.
On December 22, 2017, the Tax Cuts and Jobs Act (the "TCJA") was enacted into law. See Note 7 for further discussion of the TCJA.
A tax benefit from an uncertain tax position may be recognized when it is more-likely-than-not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. Income tax positions must meet a more-likely-than-not recognition threshold to be recognized.
The Company recognizes tax liabilities for uncertain tax positions and adjusts these liabilities when the Company's judgment changes as a result of the evaluation of new information not previously available. Due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from the current estimate of the tax liabilities. These differences will be reflected as increases or decreases to income tax expense and the effective tax rate in the period in which the new information becomes available.
Interest and penalties related to unrecognized tax benefits are recognized within income tax expense in the Consolidated Statements of Income and Comprehensive Income. Accrued interest and penalties are included within other long-term liabilities on the Consolidated Balance Sheets.
The income tax liability was $9.3 million and $3.4 million as of February 3, 2018 and January 28, 2017, respectively, and is included in accrued expenses on the Consolidated Balance Sheets. The income tax receivable was $1.8 million and $0.6 million as of February 3, 2018 and January 28, 2017, respectively, and is included in other current assets on the Consolidated Balance Sheets.
The Company may be subject to periodic audits by the Internal Revenue Service ("IRS") and other taxing authorities. These audits may challenge certain of the Company's tax positions, such as the timing and amount of deductions and allocation of taxable income to various jurisdictions.
Self Insurance
The Company is generally self-insured in the United States for medical, workers' compensation, and general liability benefits up to certain stop-loss limits. Such costs are accrued based on known claims and estimates of incurred but not reported (“IBNR”) claims. IBNR claims are estimated using historical claim information and actuarial estimates. The accrued liability for self insurance is included in accrued expenses on the Consolidated Balance Sheets.
Foreign Currency Translation
The Canadian dollar was the functional currency for the Company's Canadian business, prior to the deconsolidation of the Canadian subsidiary. See Note 14 for additional information. Assets and liabilities denominated in foreign currencies were translated into U.S. dollars (the reporting currency) at the exchange rate prevailing at the applicable balance sheet date. Revenues and expenses denominated in foreign currencies were translated into U.S. dollars at the monthly average exchange rate for the period. Gains or losses resulting from foreign currency transactions are included in other (income) expense, net whereas related translation adjustments are reported as an element of other comprehensive income, both of which are included in the Consolidated Statements of Income and Comprehensive Income.
Revenue Recognition
The Company recognizes sales at the time the customer takes possession of the merchandise which, for e-commerce transactions, requires an estimate of shipments that have not yet been received by the customer. The estimate of these shipments is based on shipping terms and historical delivery times. Amounts related to shipping and handling revenues billed to
customers in an e-commerce sale transaction are recorded in net sales, and the related shipping and handling costs are recorded in cost of goods sold, buying and occupancy costs in the Consolidated Statements of Income and Comprehensive Income. The Company's shipping and handling revenues were $8.3 million, $9.9 million, and $13.3 million in 2017, 2016, and 2015, respectively. Associate discounts on merchandise purchases are classified as a reduction of net sales. Net sales exclude sales tax collected from customers and remitted to governmental authorities.
The Company also sells merchandise to multiple franchisees pursuant to different franchise agreements. Revenues may consist of sales of merchandise and/or royalties. Revenues from merchandise sold to franchisees are recorded at the time title transfers to the franchisees. Royalty revenue is based upon a percentage of the franchisee’s net sales to third parties and is earned when such sales to third parties occur.
The Company 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. Merchandise exchanges of the same product and price, typically due to size or color preferences, are not considered merchandise returns. The sales returns reserve was $10.6 million and $10.0 million as of February 3, 2018 and January 28, 2017, respectively, and is included in accrued expenses on the Consolidated Balance Sheets.
The Company sells gift cards in its stores, on its e-commerce 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 $26.7 million and $27.5 million, as of February 3, 2018 and January 28, 2017, respectively, and is included in deferred revenue on the Consolidated Balance Sheets. The Company recognizes revenue from gift cards when they are redeemed by the customer. The Company also recognizes income on unredeemed gift cards, which is recognized proportionately using a time-based attribution method from issuance of the gift card to the time when it can be determined that the likelihood of the gift card being redeemed is remote and that there is no legal obligation to remit the unredeemed gift cards to relevant jurisdictions, referred to as "gift card breakage". The gift card breakage rate is based on historical redemption patterns and totaled $3.3 million, $3.6 million, and $3.1 million in 2017, 2016, and 2015, respectively. Gift card breakage is included in net sales in the Consolidated Statements of Income and Comprehensive Income.
Cost of Goods Sold, Buying and Occupancy Costs
Cost of goods sold, buying and occupancy costs, include merchandise costs, freight, inventory shrinkage, and other gross margin related expenses. Buying and occupancy expenses primarily include payroll, benefit costs, and other operating expenses for the buying departments (merchandising, design, manufacturing, and planning and allocation), distribution, e-commerce fulfillment, rent, common area maintenance, real estate taxes, utilities, maintenance, and depreciation for stores.
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 proceeds received from insurance claims and gain/loss on disposal of assets, which are included in other operating 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.
Other Operating Expense, Net
Other operating income, net primarily consists of gains/losses on disposal of assets and excess proceeds from the settlement of insurance claims.
Other (Income) Expense, Net
Other (income) expense, net primarily consists of foreign currency transaction gains/losses.
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 President and Chief Executive Officer and its Chief Operating Officer are the Chief Operating Decision Maker, and that there is one operating segment. Therefore, the Company reports results as a single segment, which includes the operation of its Express brick-and-mortar retail and outlet stores, e-commerce operations, and franchise operations.
The following is information regarding the Company's major product and sales channels:
|
| | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
| (in thousands) |
Apparel | $ | 1,872,420 |
| | $ | 1,915,146 |
| | $ | 2,062,235 |
|
Accessories and other | 227,364 |
| | 236,024 |
| | 242,408 |
|
Other revenue | 38,246 |
| | 41,377 |
| | 45,486 |
|
Total net sales | $ | 2,138,030 |
| | $ | 2,192,547 |
| | $ | 2,350,129 |
|
|
| | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
| (in thousands) |
Stores | $ | 1,590,745 |
| | $ | 1,737,722 |
| | $ | 1,911,923 |
|
E-commerce | 509,039 |
| | 413,448 |
| | 392,720 |
|
Other revenue | 38,246 |
| | 41,377 |
| | 45,486 |
|
Total net sales | $ | 2,138,030 |
| | $ | 2,192,547 |
| | $ | 2,350,129 |
|
E-commerce sales processed through the stores are included in E-commerce revenue. Merchandise returns are reflected in the accounting records of the channel where they are physically returned. Other revenue consists primarily of sell-off revenue related to mark-out-of-stock inventory sales to third parties, shipping and handling revenue related to e-commerce activity, and revenue from franchise agreements.
Revenues and long-lived assets relating to the Company's international operations for 2017, 2016, and 2015, and as of February 3, 2018 and January 28, 2017, respectively, were not material and, therefore, not reported separately from domestic revenues and long-lived a