Express, Inc. Reports Second Quarter 2016 Results; Introduces Third Quarter Outlook and Revises Full Year 2016 Outlook
David Kornberg, the Company’s President and Chief Executive Officer, stated: “I am disappointed with our second quarter performance as sales and earnings were below our guidance, reflecting challenging store traffic. This was compounded by a lack of clarity across the assortment. We believe we have identified the necessary actions to position Express to regain momentum and we are moving on them. Our fall assortment is more cohesive across our wearing occasions, clearly identifying the important trends, and we are aggressively pursuing several marketing initiatives focused on driving new customer acquisition and retention. In addition, we are pleased with our overall inventory position as we begin the fall season. Our overarching priorities remain unchanged: presenting our customers with a strong assortment, increasing customer acquisition and brand loyalty, enhancing gross margin as we benefit from our IT initiatives, and maintaining inventory discipline while reducing expenses. We expect to deliver incremental progress toward our priorities in 2016 and firmly believe our strategy will move us toward our double digit operating margin goal.”
Second Quarter 2016 Operating Results:
-
Net sales decreased 6% to
\\$504.8 million from\\$535.6 million in the second quarter of 2015. - Comparable sales (including e-commerce sales) decreased 8%, compared to a 7% increase in the second quarter of 2015.
-
E-commerce sales declined 7% to
\\$70.1 million . - Merchandise margin declined by 200 basis points driven by increased markdowns on clearance items as we focused on positioning our inventory for the fall season. Buying and occupancy as a percentage of net sales rose by 120 basis points. In combination, this resulted in a 320 basis point decline in gross margin, representing 29.9% of net sales compared to 33.1% in last year’s second quarter.
-
Selling, general, and administrative (SG&A) expenses were
\\$133.2 million versus\\$140.6 million in last year's second quarter. As a percentage of net sales, SG&A expenses increased by 20 basis points to 26.4%. -
Operating income was
\\$17.9 million , or 3.5% of net sales, compared to\\$35.9 million , or 6.7% of net sales in the second quarter of 2015. -
Income tax expense was
\\$7.0 million , at an effective tax rate of 40.8%, compared to\\$13.2 million , at an effective tax rate of 38.5% in last year's second quarter. -
Net income was
\\$10.1 million , or\\$0.13 per diluted share. This compares to net income of\\$21.0 million , or\\$0.25 per diluted share, in the second quarter of 2015. - Real estate activity for the second quarter of 2016 is presented in Schedule 5.
Second Quarter 2016 Balance Sheet Highlights:
-
Cash and cash equivalents totaled
\\$119.6 million versus\\$155.6 million at the end of the second quarter of 2015. During the twenty-six weeks endedJuly 30, 2016 , approximately\\$51.5 million was used to repurchase approximately 3.2 million shares of our outstanding common stock. -
Capital expenditures totaled
\\$50.4 million for the twenty-six weeks endedJuly 30, 2016 compared to\\$50.9 million for the twenty-six weeks endedAugust 1, 2015 . -
Inventory was
\\$256.6 million compared to\\$272.0 million at the end of the prior year’s second quarter, and includes approximately\\$48.5 million related toExpress Factory Outlet stores this year compared to approximately\\$42.4 million in the prior year's second quarter. Excluding Express Factory Outlet inventory, retail inventory decreased by 9% in the aggregate.
2016 Guidance:
The table below compares the Company's projected results for the
thirteen week period ended
Third Quarter 2016 Guidance |
Third Quarter 2015 Actual |
||||||
Comparable Sales | Negative high single to low double digits | 6% | |||||
Effective Tax Rate | Approximately 39% | 39.2% | |||||
Interest Expense, Net | \\$0.6 million | \\$1.2 million | |||||
Net Income | \\$7 to \\$12 million | \\$26.3 million | |||||
Diluted Earnings Per Share (EPS) | \\$0.09 to \\$0.15 | \\$0.31 | |||||
Weighted Average Diluted Shares Outstanding | 78.8 million | 84.8 million |
The table below compares the Company's projected results for the 52 week
period ended
Full Year 2016 Guidance |
Full Year 2015 |
||||||
Comparable Sales | Negative high single digits | 6% | |||||
Effective Tax Rate | Approximately 39% | 38.9% | |||||
Interest Expense, Net | \\$13.7 million(1) | \\$15.9 million(2) | |||||
Net Income | \\$72 to \\$83 million(1) | \\$116.5 million(2) | |||||
Adjusted Net Income | \\$79 to \\$90 million(3) | \\$122.4 million(3) | |||||
Diluted EPS | \\$0.91 to \\$1.05(1) | \\$1.38(2) | |||||
Adjusted Diluted EPS | \\$1.00 to \\$1.14(3) | \\$1.45(3) | |||||
Weighted Average Diluted Shares Outstanding | 79.2 million | 84.6 million | |||||
Capital Expenditures | \\$105 to \\$110 million | \\$115.3 million | |||||
(1) | Includes approximately \\$11.4 million of non-core items related to an amendment to the Times Square Flagship store lease that allows for early termination at the landlord's option. | ||||
(2) | Includes approximately \\$9.7 million of non-core items in connection with the redemption of our Senior Notes. These items consist of the redemption premium paid, the write-off of unamortized debt issuance costs, and the write-off of the unamortized debt discount. | ||||
(3) | Adjusted Net Income and Adjusted Diluted EPS are non-GAAP financial measures. Refer to Schedule 4 for a reconciliation of GAAP to Non-GAAP financial measures. | ||||
This guidance does not take into account any additional non-core items that may occur.
See Schedule 5 for a discussion of projected real estate activity.
Conference Call Information:
A conference call to discuss second quarter 2016 results is scheduled
for
About
Express is a specialty apparel and accessories retailer of women's and
men's merchandise, targeting the 20 to 30 year old customer. Express has
more than 35 years of experience offering a distinct combination of
fashion and quality for multiple lifestyle occasions at an attractive
value addressing fashion needs across work, casual, jeanswear, and
going-out occasions. The Company currently operates approximately 650
retail and factory outlet stores, located primarily in high-traffic
shopping malls, lifestyle centers, and street locations across
Forward-Looking Statements:
Certain statements are “forward-looking statements” made pursuant to the
safe harbor provisions of the Private Securities Litigation Reform Act
of 1995. Forward-looking statements include any statement that does not
directly relate to any historical or current fact and include, but are
not limited to, (1) guidance and expectations for the third quarter and
full year 2016, including statements regarding expected comparable
sales, effective tax rates, interest expense, net income, adjusted net
income, earnings per diluted share, adjusted earnings per diluted share,
and capital expenditures, (2) statements regarding expected store
openings, store closures, and gross square footage, and (3) statements
regarding the Company's future plans and initiatives, including, but not
limited to, results expected from such initiatives. Forward-looking
statements are based on our current expectations and assumptions, which
may not prove to be accurate. These statements are not guarantees and
are subject to risks, uncertainties, and changes in circumstances that
are difficult to predict, and significant contingencies, many of which
are beyond the Company's control. Many factors could cause actual
results to differ materially and adversely from these forward-looking
statements. Among these factors are (1) changes in consumer spending and
general economic conditions; (2) our ability to identify and respond to
new and changing fashion trends, customer preferences, and other related
factors; (3) fluctuations in our sales, results of operations, and cash
levels on a seasonal basis and due to a variety of other factors,
including, our product offerings relative to customer demand, the mix of
merchandise we sell, promotions, and inventory levels; (4) competition
from other retailers; (5) customer traffic at malls, shopping centers,
and at our stores and online; (6) our dependence on a strong brand
image; (7) our ability to develop and maintain a relevant and reliable
omni-channel experience for our customers; (8) the failure or breach of
information systems upon which we rely; (9) our ability to protect
customer data from fraud and theft; (10) our dependence upon third
parties to manufacture all of our merchandise; (11) changes in the cost
of raw materials, labor, and freight; (12) supply chain disruption; (13)
our dependence upon key executive management; (14) our growth strategy,
including our ability to improve the productivity of our existing
stores, open new stores, and grow our e-commerce business; (15) our
substantial lease obligations; (16) our reliance on third parties to
provide us with certain key services for our business; (17) claims made
against us resulting in litigation or changes in laws and regulations
applicable to our business; (18) our inability to protect our trademarks
or other intellectual property rights which may preclude the use of our
trademarks or other intellectual property around the world; (19)
restrictions imposed on us under the terms of our asset-based loan
facility, including restrictions on our ability to repurchase our common
stock; (20) impairment charges on long-lived assets; and (21) changes in
tax requirements, results of tax audits, and other factors that may
cause fluctuations in our effective tax rate. Additional information
concerning these and other factors can be found in
Schedule 1 |
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Express, Inc. |
||||||||||||||
July 30, 2016 | January 30, 2016 | August 1, 2015 | ||||||||||||
ASSETS | ||||||||||||||
CURRENT ASSETS: | ||||||||||||||
Cash and cash equivalents | \\$ | 119,564 | \\$ | 186,903 | \\$ | 155,645 | ||||||||
Receivables, net | 15,527 | 22,130 | 22,073 | |||||||||||
Inventories | 256,602 | 255,350 | 272,011 | |||||||||||
Prepaid minimum rent | 31,576 | 30,694 | 29,926 | |||||||||||
Other | 26,519 | 18,342 | 27,563 | |||||||||||
Total current assets | 449,788 | 513,419 | 507,218 | |||||||||||
PROPERTY AND EQUIPMENT | 991,377 | 948,608 | 894,246 | |||||||||||
Less: accumulated depreciation | (529,712 | ) | (504,211 | ) | (467,230 | ) | ||||||||
Property and equipment, net | 461,665 | 444,397 | 427,016 | |||||||||||
TRADENAME/DOMAIN NAMES/TRADEMARKS | 197,618 | 197,597 | 197,597 | |||||||||||
DEFERRED TAX ASSETS | 21,510 | 21,227 | 12,348 | |||||||||||
OTHER ASSETS | 11,965 | 2,004 | 3,097 | |||||||||||
Total assets | \\$ | 1,142,546 | \\$ | 1,178,644 | \\$ | 1,147,276 | ||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||
CURRENT LIABILITIES: | ||||||||||||||
Accounts payable | \\$ | 162,457 | \\$ | 149,884 | \\$ | 179,120 | ||||||||
Deferred revenue | 23,462 | 30,895 | 22,151 | |||||||||||
Accrued expenses | 165,700 | 126,624 | 110,554 | |||||||||||
Total current liabilities | 351,619 | 307,403 | 311,825 | |||||||||||
DEFERRED LEASE CREDITS | 145,002 | 139,236 | 132,597 | |||||||||||
OTHER LONG-TERM LIABILITIES | 49,621 | 114,052 | 105,123 | |||||||||||
Total liabilities | 546,242 | 560,691 | 549,545 | |||||||||||
COMMITMENTS AND CONTINGENCIES | ||||||||||||||
Total stockholders’ equity | 596,304 | 617,953 | 597,731 | |||||||||||
Total liabilities and stockholders’ equity | \\$ | 1,142,546 | \\$ | 1,178,644 | \\$ | 1,147,276 | ||||||||
Schedule 2 |
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Express, Inc. |
|||||||||||||||||
Thirteen Weeks Ended | Twenty-Six Weeks Ended | ||||||||||||||||
July 30, 2016 |
August 1, |
July 30, 2016 |
August 1, |
||||||||||||||
NET SALES | \\$ | 504,767 | \\$ | 535,582 | \\$ | 1,007,676 | \\$ | 1,037,960 | |||||||||
COST OF GOODS SOLD, BUYING AND OCCUPANCY COSTS | 353,848 | 358,392 | 689,009 | 694,326 | |||||||||||||
Gross profit | 150,919 | 177,190 | 318,667 | 343,634 | |||||||||||||
OPERATING EXPENSES: | |||||||||||||||||
Selling, general, and administrative expenses | 133,152 | 140,573 | 268,914 | 273,749 | |||||||||||||
Other operating (income) expense, net | (120 | ) | 752 | 45 | 72 | ||||||||||||
Total operating expenses | 133,032 | 141,325 | 268,959 | 273,821 | |||||||||||||
OPERATING INCOME | 17,887 | 35,865 | 49,708 | 69,813 | |||||||||||||
INTEREST EXPENSE, NET | 547 | 1,231 | 12,278 | 13,544 | |||||||||||||
OTHER EXPENSE (INCOME), NET | 196 | 419 | (494 | ) | 70 | ||||||||||||
INCOME BEFORE INCOME TAXES | 17,144 | 34,215 | 37,924 | 56,199 | |||||||||||||
INCOME TAX EXPENSE | 7,000 | 13,187 | 14,898 | 22,109 | |||||||||||||
NET INCOME | \\$ | 10,144 | \\$ | 21,028 | \\$ | 23,026 | \\$ | 34,090 | |||||||||
EARNINGS PER SHARE: | |||||||||||||||||
Basic | \\$ | 0.13 | \\$ | 0.25 | \\$ | 0.29 | \\$ | 0.40 | |||||||||
Diluted | \\$ | 0.13 | \\$ | 0.25 | \\$ | 0.29 | \\$ | 0.40 | |||||||||
WEIGHTED AVERAGE SHARES OUTSTANDING: | |||||||||||||||||
Basic | 78,798 | 84,677 | 78,930 | 84,560 | |||||||||||||
Diluted | 78,945 | 85,201 | 79,429 | 85,089 | |||||||||||||
Schedule 3 |
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Express, Inc. |
||||||||||
Twenty-Six Weeks Ended | ||||||||||
July 30, 2016 | August 1, 2015 | |||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||
Net income | \\$ | 23,026 | \\$ | 34,090 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||
Depreciation and amortization | 36,365 | 37,085 | ||||||||
Loss on disposal of property and equipment | 875 | 1,314 | ||||||||
Impairment charge | 829 | — | ||||||||
Amortization of lease financing obligation discount | 11,354 | — | ||||||||
Excess tax benefit from share-based compensation | — | (262 | ) | |||||||
Share-based compensation | 7,580 | 11,069 | ||||||||
Non-cash loss on extinguishment of debt | — | 5,314 | ||||||||
Deferred taxes | (283 | ) | 22 | |||||||
Landlord allowance amortization | (5,211 | ) | (5,980 | ) | ||||||
Payment of original issue discount | — | (2,812 | ) | |||||||
Changes in operating assets and liabilities: | ||||||||||
Receivables, net | 6,635 | 1,201 | ||||||||
Inventories | (1,011 | ) | (31,049 | ) | ||||||
Accounts payable, deferred revenue, and accrued expenses | (37,350 | ) | 13,320 | |||||||
Other assets and liabilities | 3,340 | 171 | ||||||||
Net cash provided by operating activities | 46,149 | 63,483 | ||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||
Capital expenditures | (50,355 | ) | (50,904 | ) | ||||||
Purchase of intangible assets | (21 | ) | (35 | ) | ||||||
Investment in equity interests | (10,133 | ) | — | |||||||
Net cash used in investing activities | (60,509 | ) | (50,939 | ) | ||||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||
Repayment of long-term debt | — | (198,038 | ) | |||||||
Costs incurred in connection with debt arrangements | — | (852 | ) | |||||||
Payments on lease financing obligations | (785 | ) | (773 | ) | ||||||
Excess tax benefit from share-based compensation | — | 262 | ||||||||
Proceeds from exercise of stock options | 2,703 | 361 | ||||||||
Repurchase of common stock under share repurchase program | (51,538 | ) | — | |||||||
Repurchase of shares for tax withholding obligations | (4,403 | ) | (3,690 | ) | ||||||
Net cash used in financing activities | (54,023 | ) | (202,730 | ) | ||||||
EFFECT OF EXCHANGE RATE ON CASH | 1,044 | (328 | ) | |||||||
NET DECREASE IN CASH AND CASH EQUIVALENTS | (67,339 | ) | (190,514 | ) | ||||||
CASH AND CASH EQUIVALENTS, Beginning of period | 186,903 | 346,159 | ||||||||
CASH AND CASH EQUIVALENTS, End of period | \\$ | 119,564 | \\$ | 155,645 | ||||||
Schedule 4
Supplemental Information - Consolidated Statements of Income
Reconciliation
of GAAP to Non-GAAP Financial Measures
(Unaudited)
The Company supplements the reporting of its financial information
determined under
Twenty-Six Weeks Ended July 30, 2016 | ||||||||||||||
(in thousands, except per share amounts) | Net Income |
Earnings per Diluted |
Weighted Average |
|||||||||||
Reported GAAP Measure | \\$ | 23,026 | \\$ | 0.29 | 79,429 | |||||||||
Interest Expense (a) | 11,354 | 0.14 | ||||||||||||
Income Tax Benefit (b) | (4,428 | ) | (0.06 | ) | ||||||||||
Adjusted Non-GAAP Measure | \\$ | 29,952 | \\$ | 0.38 |
(a) | Represents non-core items related to the amendment of the Times Square Flagship store lease. | ||||
(b) | Represents the tax impact of the interest expense adjustment at our statutory rate of approximately 39% for the twenty-six weeks ended July 30, 2016. | ||||
Twenty-Six Weeks Ended August 1, 2015 | ||||||||||||||
(in thousands, except per share amounts) | Net Income |
Earnings per Diluted |
Weighted Average |
|||||||||||
Reported GAAP Measure | \\$ | 34,090 | \\$ | 0.40 | 85,089 | |||||||||
Interest Expense (a) | 9,657 | 0.11 | ||||||||||||
Income Tax Benefit (b) | (3,741 | ) | (0.04 | ) | ||||||||||
Adjusted Non-GAAP Measure | \\$ | 40,006 | \\$ | 0.47 |
(a) | Includes the redemption premium paid, the write-off of unamortized debt issuance costs, and the write-off of the unamortized debt discount related to the redemption of all \\$200.9 million of our Senior Notes. | ||||
(b) | Represents the tax impact of the interest expense adjustment at our statutory rate of approximately 39% for the twenty-six weeks ended August 1, 2015. | ||||
Schedule 4 (Continued)
Supplemental Information - Consolidated Statements of Income
Reconciliation
of GAAP to Non-GAAP Financial Measures
(Unaudited)
Fifty-Two Weeks Ended January 28, 2017 | ||||||||||||||
(in thousands, except per share amounts) | Projected Net Income |
Projected Earnings |
Projected Weighted |
|||||||||||
Projected GAAP Measure * | \\$ | 77,500 | \\$ | 0.98 | 79,244 | |||||||||
Interest Expense (a) | 11,354 | 0.14 | ||||||||||||
Income Tax Benefit (b) | (4,428 | ) | (0.06 | ) | ||||||||||
Projected Adjusted Non-GAAP Measure * | \\$ | 84,426 | \\$ | 1.07 |
(a) | Represents non-core items related to the amendment of the Times Square Flagship store lease. | ||||
(b) | Represents the tax impact of the interest expense adjustment at our statutory rate of approximately 39% for the fifty-two weeks ended January 28, 2017. | ||||
* Represents mid-point of guidance range.
Fifty-Two Weeks Ended January 30, 2016 | ||||||||||||||
(in thousands, except per share amounts) | Net Income |
Earnings per Diluted |
Weighted Average |
|||||||||||
Reported GAAP Measure | \\$ | 116,513 | \\$ | 1.38 | 84,591 | |||||||||
Interest Expense (a) | 9,657 | 0.11 | ||||||||||||
Income Tax Benefit (b) | (3,741 | ) | (0.04 | ) | ||||||||||
Adjusted Non-GAAP Measure | \\$ | 122,429 | \\$ | 1.45 |
(a) | Includes the redemption premium paid, the write-off of unamortized debt issuance costs, and the write-off of the unamortized debt discount related to the redemption of all \\$200.9 million of our Senior Notes. | ||||
(b) | Represents the tax impact of the interest expense adjustment at our statutory rate of approximately 39% for the fifty-two weeks ended January 30, 2016. | ||||
Schedule 5 |
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Express, Inc. |
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Second Quarter 2016 - Actual | July 30, 2016 - Actual | |||||||||||||||
Company-Operated Stores | Opened | Closed | Conversion | Store Count |
Gross Square |
|||||||||||
United States - Retail Stores | — | (1) | (3) | 537 | ||||||||||||
United States - Outlet Stores | 6 | — | 3 | 94 | ||||||||||||
Canada | — | — | — | 17 | ||||||||||||
Total | 6 | (1) | — | 648 | 5.6 million | |||||||||||
Third Quarter 2016 - Projected | October 29, 2016 - Projected | |||||||||||||||
Company-Operated Stores | Opened | Closed | Conversion | Store Count |
Gross Square |
|||||||||||
United States - Retail Stores | — | — | — | 537 | ||||||||||||
United States - Outlet Stores | 5 | — | — | 99 | ||||||||||||
Canada | — | — | — | 17 | ||||||||||||
Total | 5 | — | — | 653 | 5.6 million | |||||||||||
Full Year 2016 - Projected | January 28, 2017 - Projected | |||||||||||||||
Company-Operated Stores | Opened | Closed | Conversion | Store Count |
Gross Square |
|||||||||||
United States - Retail Stores | — | (16) | (4) | 535 | ||||||||||||
United States - Outlet Stores | 19 | — | 4 | 104 | ||||||||||||
Canada | — | — | — | 17 | ||||||||||||
Total | 19 | (16) | — | 656 | 5.7 million |
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