EXPRESS, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in Thousands, Except Per Share Amounts)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
July 30, 2016
|
|
January 30, 2016
|
ASSETS
|
|
|
|
CURRENT ASSETS:
|
|
|
|
Cash and cash equivalents
|
$
|
119,564
|
|
|
$
|
186,903
|
|
Receivables, net
|
15,527
|
|
|
22,130
|
|
Inventories
|
256,602
|
|
|
255,350
|
|
Prepaid minimum rent
|
31,576
|
|
|
30,694
|
|
Other
|
26,519
|
|
|
18,342
|
|
Total current assets
|
449,788
|
|
|
513,419
|
|
|
|
|
|
PROPERTY AND EQUIPMENT
|
991,377
|
|
|
948,608
|
|
Less: accumulated depreciation
|
(529,712
|
)
|
|
(504,211
|
)
|
Property and equipment, net
|
461,665
|
|
|
444,397
|
|
|
|
|
|
TRADENAME/DOMAIN NAMES/TRADEMARKS
|
197,618
|
|
|
197,597
|
|
DEFERRED TAX ASSETS
|
21,510
|
|
|
21,227
|
|
OTHER ASSETS
|
11,965
|
|
|
2,004
|
|
Total assets
|
$
|
1,142,546
|
|
|
$
|
1,178,644
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
CURRENT LIABILITIES:
|
|
|
|
Accounts payable
|
$
|
162,457
|
|
|
$
|
149,884
|
|
Deferred revenue
|
23,462
|
|
|
30,895
|
|
Accrued expenses
|
165,700
|
|
|
126,624
|
|
Total current liabilities
|
351,619
|
|
|
307,403
|
|
|
|
|
|
DEFERRED LEASE CREDITS
|
145,002
|
|
|
139,236
|
|
OTHER LONG-TERM LIABILITIES
|
49,621
|
|
|
114,052
|
|
Total liabilities
|
546,242
|
|
|
560,691
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES (Note 10)
|
|
|
|
|
|
|
|
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; 92,026 shares and 91,127 shares issued at July 30, 2016 and January 30, 2016, respectively, and 78,401 shares and 80,914 shares outstanding at July 30, 2016 and January 30, 2016, respectively
|
920
|
|
|
911
|
|
Additional paid-in capital
|
179,790
|
|
|
169,515
|
|
Accumulated other comprehensive loss
|
(3,683
|
)
|
|
(4,665
|
)
|
Retained earnings
|
656,324
|
|
|
633,298
|
|
Treasury stock – at average cost; 13,625 shares and 10,213 shares at July 30, 2016 and January 30, 2016, respectively
|
(237,047
|
)
|
|
(181,106
|
)
|
Total stockholders’ equity
|
596,304
|
|
|
617,953
|
|
Total liabilities and stockholders’ equity
|
$
|
1,142,546
|
|
|
$
|
1,178,644
|
|
See Notes to Unaudited Consolidated Financial Statements.
EXPRESS, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Amounts in Thousands, Except Per Share Amounts)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
Twenty-Six Weeks Ended
|
|
July 30, 2016
|
|
August 1, 2015
|
|
July 30, 2016
|
|
August 1, 2015
|
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
|
|
|
|
|
|
|
|
|
|
OTHER COMPREHENSIVE INCOME:
|
|
|
|
|
|
|
|
Foreign currency translation (loss) gain
|
(549
|
)
|
|
(1,177
|
)
|
|
982
|
|
|
(456
|
)
|
COMPREHENSIVE INCOME
|
$
|
9,595
|
|
|
$
|
19,851
|
|
|
$
|
24,008
|
|
|
$
|
33,634
|
|
|
|
|
|
|
|
|
|
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
|
|
See Notes to Unaudited Consolidated Financial Statements.
EXPRESS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in Thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
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 (see Note 11)
|
(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
|
|
See Notes to Unaudited Consolidated Financial Statements.
Notes to Unaudited 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
July 30, 2016
, Express operated
554
primarily mall-based retail stores in the United States, Canada, and Puerto Rico as well as
94
factory outlet stores. Additionally, as of
July 30, 2016
, the Company earned revenue from
32
franchise stores in the Middle East, Latin America, and South Africa. 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. During the fourth quarter of 2015, the Company made a strategic decision to exit its franchise agreements in the Middle East and South Africa. All
15
of these locations are expected to be closed by the end of 2016.
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 "
2016
" and "
2015
" represent the 52-week periods ended
January 28, 2017
and
January 30, 2016
, respectively. All references herein to "the
second quarter of 2016
" and "the
second quarter of 2015
" represent the thirteen weeks ended
July 30, 2016
and
August 1, 2015
, respectively.
Basis of Presentation
The accompanying unaudited Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles in the United States of America ("GAAP") for interim financial information and therefore do not include all of the information or footnotes required by GAAP for complete financial statements. In the opinion of management, the accompanying unaudited Consolidated Financial Statements reflect all adjustments (which are of a normal recurring nature) necessary to state fairly the financial position, results of operations, and cash flows for the interim periods, but are not necessarily indicative of the results of operations to be anticipated for
2016
. Therefore, these statements should be read in conjunction with the Consolidated Financial Statements and Notes thereto for the year ended
January 30, 2016
, included in the Company's Annual Report on Form 10-K, filed with the SEC on
March 30, 2016
.
Principles of Consolidation
The unaudited Consolidated Financial Statements include the accounts of Express, Inc. and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the unaudited Consolidated Financial Statements and the reported amounts of revenue and expense during the reporting period, as well as the related disclosure of contingent assets and liabilities as of the date of the unaudited Consolidated Financial Statements. Actual results may differ from those estimates. The Company revises its estimates and assumptions as new information becomes available.
Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09. ASU 2014-09 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. In August 2015, the FASB issued ASU 2015-14, "Revenue from Contracts with Customers (Topic 606)," which defers the effective date of ASU 2014-09 to annual and interim reporting periods beginning after December 15, 2017 with early application permitted for annual and interim reporting periods beginning after December 15, 2016. The Company is currently evaluating the impact that adopting this standard will have on its consolidated financial statements.
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 is currently evaluating the impact that adopting ASU 2016-02 will have on its consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-09, "Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting." ASU 2016-09 simplifies several of the elements of accounting for share-based payments, including recognizing all excess tax benefits and tax deficiencies in the income statement immediately, allowing an entity to elect to either estimate the total number of awards that will vest or recognize forfeitures when they occur, modifying the tax withholding threshold to qualify for equity classification up to the employees' maximum statutory tax withholding, and clarifying the classification for excess tax benefits on the statement of cash flows. The Company elected to early adopt the new standard in the first quarter of 2016 on a prospective basis. The impact of adoption did not have a material impact on the Company’s financial position, results of operations, or cash flows. The Company will continue to estimate forfeitures expected to occur in determining the amount of compensation cost to be recognized in each period.
2. Segment Reporting
The Company defines an operating segment on the same basis that it uses to evaluate performance internally. The Company has determined that, together, its 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 categories and sales channels:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
Twenty-Six Weeks Ended
|
|
July 30, 2016
|
|
August 1, 2015
|
|
July 30, 2016
|
|
August 1, 2015
|
|
(in thousands)
|
|
(in thousands)
|
Apparel
|
$
|
438,848
|
|
|
$
|
468,521
|
|
|
$
|
880,091
|
|
|
$
|
911,986
|
|
Accessories and other
|
54,010
|
|
|
52,967
|
|
|
106,662
|
|
|
102,212
|
|
Other revenue
|
11,909
|
|
|
14,094
|
|
|
20,923
|
|
|
23,762
|
|
Total net sales
|
$
|
504,767
|
|
|
$
|
535,582
|
|
|
$
|
1,007,676
|
|
|
$
|
1,037,960
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
Twenty-Six Weeks Ended
|
|
July 30, 2016
|
|
August 1, 2015
|
|
July 30, 2016
|
|
August 1, 2015
|
|
(in thousands)
|
|
(in thousands)
|
Stores
|
$
|
422,804
|
|
|
$
|
446,527
|
|
|
$
|
839,706
|
|
|
$
|
861,601
|
|
E-commerce
|
70,054
|
|
|
74,961
|
|
|
147,047
|
|
|
152,597
|
|
Other revenue
|
11,909
|
|
|
14,094
|
|
|
20,923
|
|
|
23,762
|
|
Total net sales
|
$
|
504,767
|
|
|
$
|
535,582
|
|
|
$
|
1,007,676
|
|
|
$
|
1,037,960
|
|
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.
Revenue and long-lived assets relating to the Company's international operations for the
thirteen and twenty-six weeks ended
and as of
July 30, 2016
and
August 1, 2015
, respectively, were not material for any period presented and, therefore, are not reported separately from domestic revenue or long-lived assets.
3. Earnings Per Share
The following table provides a reconciliation between basic and diluted weighted-average shares used to calculate basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
Twenty-Six Weeks Ended
|
|
July 30, 2016
|
|
August 1, 2015
|
|
July 30, 2016
|
|
August 1, 2015
|
|
(in thousands)
|
Weighted-average shares - basic
|
78,798
|
|
|
84,677
|
|
|
78,930
|
|
|
84,560
|
|
Dilutive effect of stock options, restricted stock units, and restricted stock
|
147
|
|
|
524
|
|
|
499
|
|
|
529
|
|
Weighted-average shares - diluted
|
78,945
|
|
|
85,201
|
|
|
79,429
|
|
|
85,089
|
|
Equity awards representing
4.4 million
and
3.4 million
shares of common stock were excluded from the computations of diluted earnings per share for the
thirteen and twenty-six weeks ended
July 30, 2016
, respectively, as the inclusion of these awards would have been anti-dilutive. Equity awards representing
2.2 million
and
3.3 million
shares of common stock were excluded from the computations of diluted earnings per share for the
thirteen and twenty-six weeks ended
August 1, 2015
, respectively, as the inclusion of these awards would have been anti-dilutive.
Additionally, for the
thirteen and twenty-six weeks ended
July 30, 2016
,
0.7 million
shares were excluded from the computations of diluted weighted average shares because the number of shares that will ultimately be issued is contingent on the Company's performance compared to pre-established performance goals which have not been achieved as of
July 30, 2016
.
4. Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Assets and liabilities measured at fair value are classified using the following hierarchy, which is based upon the transparency of inputs to the valuation as of the measurement date.
Level 1-Valuation is based upon quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2-Valuation is based upon quoted prices for similar assets and liabilities in active markets or other inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
Level 3-Valuation is based upon other unobservable inputs that are significant to the fair value measurement.
Financial Assets
The following table presents the Company's financial assets measured at fair value on a recurring basis as of
July 30, 2016
and
January 30, 2016
, aggregated by the level in the fair value hierarchy within which those measurements fall.
|
|
|
|
|
|
|
|
|
|
|
|
July 30, 2016
|
|
Level 1
|
Level 2
|
Level 3
|
|
(in thousands)
|
Money market funds
|
$
|
77,481
|
|
$
|
—
|
|
$
|
—
|
|
|
|
|
January 30, 2016
|
|
Level 1
|
Level 2
|
Level 3
|
|
(in thousands)
|
Money market funds
|
$
|
152,069
|
|
$
|
—
|
|
$
|
—
|
|
The carrying amounts reflected on the unaudited Consolidated Balance Sheets for cash, cash equivalents, receivables, prepaid expenses, and payables as of
July 30, 2016
and
January 30, 2016
approximated their fair values.
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, if certain triggering events occur indicating the carrying value of
these assets may not be recoverable, or annually in the case of indefinite lived intangibles, an impairment test is required. The impairment test requires the Company to estimate the fair value of the assets and compare this to the carrying value of the assets. If the fair value of the asset is 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. During the
thirteen and twenty-six weeks ended
July 30, 2016
, the Company recognized impairment charges of approximately
$0.8 million
related to
two
stores, both of which are now fully impaired. During the
thirteen and twenty-six weeks ended
August 1, 2015
, the Company did
no
t recognize any impairment charges.
5. Intangible Assets
The following table provides the significant components of intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 30, 2016
|
|
Cost
|
|
Accumulated
Amortization
|
|
Ending Net Balance
|
|
(in thousands)
|
Tradename/domain names/trademarks
|
$
|
197,618
|
|
|
$
|
—
|
|
|
$
|
197,618
|
|
Licensing arrangements
|
425
|
|
|
196
|
|
|
229
|
|
|
$
|
198,043
|
|
|
$
|
196
|
|
|
$
|
197,847
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 30, 2016
|
|
Cost
|
|
Accumulated
Amortization
|
|
Ending Net Balance
|
|
(in thousands)
|
Tradename/domain names/trademarks
|
$
|
197,597
|
|
|
$
|
—
|
|
|
$
|
197,597
|
|
Licensing arrangements
|
425
|
|
|
172
|
|
|
253
|
|
|
$
|
198,022
|
|
|
$
|
172
|
|
|
$
|
197,850
|
|
The Company's tradename, Internet domain names, and trademarks have indefinite lives. Licensing arrangements are amortized over a period of
ten years
and are included in other assets on the unaudited Consolidated Balance Sheets. Amortization expense was nominal for the
thirteen and twenty-six weeks ended
July 30, 2016
. Amortization expense was nominal for the
thirteen weeks ended
August 1, 2015
and
$0.1 million
for the
twenty-six weeks ended
August 1, 2015
.
6. Income Taxes
The provision for income taxes is based on a current estimate of the annual effective tax rate adjusted to reflect the impact of discrete items. The Company's effective tax rate was
40.8%
and
38.5%
for the
thirteen weeks ended July 30, 2016
and
August 1, 2015
, respectively. The Company's effective tax rate was
39.3%
for the
twenty-six weeks ended July 30, 2016
and
August 1, 2015
.
Our former Chairman and Chief Executive Officer retired from his role as Chairman of the Company's Board of Directors (the "Board") on June 8, 2016. In accordance with the Amended and Restated Express, Inc. 2010 Incentive Compensation Plan (the "2010 Plan"), he has
90
days from this date to exercise certain stock options. The expiration of these options could impact the realization of certain deferred tax assets and therefore result in an increase in income tax expense of up to
$4.2 million
with a corresponding decrease to deferred tax assets at the end of the 90-day period.
7. Lease Financing Obligations
In certain lease arrangements, the Company is involved in the construction of the building. To the extent the Company is involved in the construction of structural improvements or takes construction risk prior to commencement of a lease, it is deemed the owner of the project for accounting purposes. Therefore, the Company records an asset in property and equipment on the unaudited Consolidated Balance Sheets, including any capitalized interest costs, and related liabilities in accrued interest and lease financing obligations in other long-term liabilities on the unaudited Consolidated Balance Sheets, for the replacement cost of the Company's portion of the pre-existing building plus the amount of construction costs incurred by the landlord as of the balance sheet date.
The initial terms of the lease arrangements for which the Company is considered the owner are expected to expire in 2023 and 2030. The net book value of landlord funded construction, replacement cost of pre-existing property, and capitalized interest in property and equipment on the unaudited Consolidated Balance Sheets was
$65.6 million
and
$67.4 million
, as of
July 30, 2016
and
January 30, 2016
, respectively. There was also
$5.6 million
and
$69.6 million
of lease financing obligations as of
July 30, 2016
and
January 30, 2016
, respectively, in other long-term liabilities on the unaudited Consolidated Balance Sheets. In the first quarter of 2016,
$63.7 million
was reclassified to accrued expenses as a result of the amendment to the Times Square store lease discussed further below. Transactions involving the initial recording of these assets and liabilities are classified as non-cash items for purposes of the unaudited Consolidated Statements of Cash Flows.
Rent expense relating to the land is recognized on a straight-line basis over the lease term. The Company does not report rent expense for the portion of the rent payment determined to be related to the buildings which are owned for accounting purposes. Rather, this portion of the rent payment under the lease is recognized as interest expense and a reduction of the lease financing obligations.
In February 2016, the Company amended its lease arrangement with the landlord of the Times Square Flagship store. The Company had previously determined it was the owner of the store for accounting purposes based on an assessment of the lease arrangement at inception as described above. The amendment provides the landlord with the option to cancel the lease upon sufficient notice through December 31, 2016. If the landlord exercises this option, the Company will be required to make a cash payment of
$15 million
to the landlord. In conjunction with amending the lease, the Company recognized an
$11.4 million
put option liability and a related offset as a discount on the lease financing obligation. The discount was amortized over the shortest period under which the landlord was able to exercise this option (
60
days). This resulted in the full amortization of the
$11.4 million
discount during the first quarter of 2016. The amortization of the discount was recorded as interest expense. As of
July 30, 2016
, the fair value of the put option was
$10.1 million
and is included within accrued expenses on the unaudited Consolidated Balance Sheets. The remaining lease financing obligation of
$63.3 million
is also included in accrued expenses on the unaudited Consolidated Balance Sheets.
8. Debt
A summary of the Company's financing activities are as follows:
Revolving Credit Facility
On May 20, 2015, Express Holding, LLC, a wholly-owned subsidiary of the Company ("Express Holding"), and its subsidiaries entered into an Amended and Restated
$250.0 million
secured Asset-Based Credit Facility ("Revolving Credit Facility"). The expiration date of the facility is May 20, 2020. As of
July 30, 2016
, there were
no
borrowings outstanding and approximately
$240.9 million
available under the Revolving Credit Facility.
The Revolving Credit Facility requires Express Holding and its subsidiaries to maintain a fixed charge coverage ratio of at least
1.0
:
1.0
if excess availability plus eligible cash collateral is less than
10%
of the borrowing base. In addition, the Revolving Credit Facility contains customary covenants and restrictions on Express Holding's and its subsidiaries' activities, including, but not limited to, limitations on the incurrence of additional indebtedness, liens, negative pledges, guarantees, investments, loans, asset sales, mergers, acquisitions, prepayment of other debt, distributions, dividends, the repurchase of capital stock, transactions with affiliates, the ability to change the nature of its business or fiscal year, and permitted business activities. All obligations under the Revolving Credit Facility are guaranteed by Express Holding and its domestic subsidiaries (that are not borrowers) and secured by a lien on, among other assets, substantially all working capital assets including cash, accounts receivable, and inventory, of Express Holding and its domestic subsidiaries.
Senior Notes
On March 5, 2010, Express, LLC and Express Finance Corp., wholly-owned subsidiaries of the Company, co-issued, in a private placement,
$250.0 million
of 8 3/4% Senior Notes due in 2018 (the "Senior Notes") at an offering price of
98.6%
of the face value.
On March 1, 2015, the outstanding notes in the amount of
$200.9 million
were redeemed in full at
102.19%
of the principal amount, with total payments equal to
$205.3 million
, plus accrued and unpaid interest to, but not including, the redemption date.
Loss on Extinguishment
In connection with the redemption of the Senior Notes in the first quarter of 2015, the Company recognized a
$9.7 million
loss on extinguishment of debt, which was recorded as interest expense in the unaudited Consolidated Statements of Income and
Comprehensive Income. The redemption premium represented approximately
$4.4 million
of this loss on extinguishment. The remaining loss on extinguishment was attributable to the unamortized debt issuance costs and unamortized debt discount write-offs totaling
$5.3 million
. The unamortized debt issuance costs and unamortized debt discount write-offs are presented as a non-cash adjustment to reconcile net income to net cash provided by operating activities within the unaudited Consolidated Statements of Cash Flows.
Letters of Credit
The Company may enter into stand-by letters of credit ("stand-by LCs") on an as-needed basis to secure payment obligations for merchandise purchases and other general and administrative expenses. As of
July 30, 2016
and
January 30, 2016
, outstanding stand-by LCs totaled
$2.4 million
and
$2.8 million
, respectively.
9. Share-Based Compensation
The Company records the fair value of share-based payments to employees in the unaudited Consolidated Statements of Income and Comprehensive Income as compensation expense, net of forfeitures, over the requisite service period.
Share-Based Compensation Plans
The following summarizes share-based compensation expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
Twenty-Six Weeks Ended
|
|
July 30, 2016
|
|
August 1, 2015
|
|
July 30, 2016
|
|
August 1, 2015
|
|
(in thousands)
|
Restricted stock units and restricted stock
|
$
|
2,695
|
|
|
$
|
6,451
|
|
|
$
|
6,000
|
|
|
$
|
9,058
|
|
Stock options
|
517
|
|
|
767
|
|
|
1,580
|
|
|
2,011
|
|
Total share-based compensation
|
$
|
3,212
|
|
|
$
|
7,218
|
|
|
$
|
7,580
|
|
|
$
|
11,069
|
|
The stock compensation related income tax benefit recognized by the Company during the
thirteen and twenty-six weeks ended
July 30, 2016
was
$0.4 million
and
$5.9 million
, respectively. The stock compensation related income tax benefit recognized by the Company during the
thirteen and twenty-six weeks ended
August 1, 2015
was
$1.1 million
and
$3.8 million
, respectively.
Stock Options
During the
twenty-six weeks ended July 30, 2016
, the Company granted stock options under the 2010 Plan. The fair value of the stock options is determined using the Black-Scholes-Merton option-pricing model as described later in this note. Stock options granted in
2016
under the 2010 Plan vest
25%
per year over
four years
or upon reaching retirement eligibility, defined as providing
ten years
of service and being at least
55 years
old. These options have a
ten
year contractual life. The expense for stock options is recognized using the straight-line attribution method.
The Company's activity with respect to stock options during the
twenty-six weeks ended July 30, 2016
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Grant Date
Weighted Average
Exercise Price Per Share
|
|
Weighted-Average Remaining Contractual Life (in years)
|
|
Aggregate Intrinsic Value
|
|
(in thousands, except per share amounts and years)
|
Outstanding, January 31, 2016
|
3,446
|
|
|
$
|
18.31
|
|
|
|
|
|
Granted
|
229
|
|
|
$
|
21.14
|
|
|
|
|
|
Exercised
|
(156
|
)
|
|
$
|
17.35
|
|
|
|
|
|
Forfeited or expired
|
(73
|
)
|
|
$
|
20.14
|
|
|
|
|
|
Outstanding, July 30, 2016
|
3,446
|
|
|
$
|
18.50
|
|
|
5.7
|
|
$
|
170
|
|
Expected to vest at July 30, 2016
|
558
|
|
|
$
|
18.27
|
|
|
8.5
|
|
$
|
39
|
|
Exercisable at July 30, 2016
|
2,858
|
|
|
$
|
18.53
|
|
|
5.2
|
|
$
|
131
|
|
The following table provides additional information regarding the Company's stock options:
|
|
|
|
|
|
|
|
|
|
Twenty-Six Weeks Ended
|
|
July 30, 2016
|
|
August 1, 2015
|
|
(in thousands, except per share amounts)
|
Weighted average grant date fair value of options granted (per share)
|
$
|
9.50
|
|
|
$
|
7.79
|
|
Total intrinsic value of options exercised
|
$
|
536
|
|
|
$
|
19
|
|
As of
July 30, 2016
, there was approximately
$3.3 million
of total unrecognized compensation expense related to stock options, which is expected to be recognized over a weighted average period of approximately
1.7
years.
The Company uses the Black-Scholes-Merton option-pricing model to value stock options granted to employees. The Company's determination of the fair value of stock options is affected by the Company's stock price as well as a number of subjective and complex assumptions. These assumptions include the risk-free interest rate, the Company's expected stock price volatility over the term of the award, expected term of the award, and dividend yield.
The fair value of stock options was estimated at the grant date using the Black-Scholes-Merton option pricing model with the following weighted-average assumptions:
|
|
|
|
|
|
|
|
Twenty-Six Weeks Ended
|
|
July 30, 2016
|
|
August 1, 2015
|
Risk-free interest rate
(1)
|
1.60
|
%
|
|
1.60
|
%
|
Price volatility
(2)
|
43.15
|
%
|
|
47.81
|
%
|
Expected term (years)
(3)
|
6.54
|
|
|
6.25
|
|
Dividend yield
(4)
|
—
|
|
|
—
|
|
|
|
(1)
|
Represents the yield on U.S. Treasury securities with a term consistent with the expected term of the stock options.
|
|
|
(2)
|
Primarily based on the historical volatility of the Company's common stock over a period consistent with the expected term of the stock options.
|
|
|
(3)
|
Beginning in 2016, the Company calculated the expected term assumption using the midpoint scenario, which combines historical exercise data with hypothetical exercise data for outstanding options, as the Company believes this data currently represents the best estimate of the expected term of new employee options.
|
|
|
(4)
|
The Company does not currently plan on paying regular dividends.
|
Restricted Stock Units and Restricted Stock
During the
twenty-six weeks ended July 30, 2016
, the Company granted restricted stock units ("RSUs") under the 2010 Plan, including
0.3 million
RSUs with performance conditions. The fair value of RSUs is determined based on the Company's closing stock price on the day prior to the grant date in accordance with the 2010 Plan. The expense for RSUs without performance conditions is recognized using the straight-line attribution method. The expense for RSUs with performance conditions is recognized using the graded vesting method based on the expected achievement of the performance conditions. The RSUs with performance conditions are also subject to time-based vesting. All of the RSUs granted during the
twenty-six weeks ended July 30, 2016
that are earned based on the achievement of performance criteria will vest on April 15, 2019. RSUs without performance conditions vest ratably over
four
years.
The Company's activity with respect to RSUs and restricted stock, including awards with performance conditions, for the
twenty-six weeks ended July 30, 2016
was as follows:
|
|
|
|
|
|
|
|
Number of
Shares
|
Grant Date
Weighted Average
Fair Value Per Share
|
|
(in thousands, except per share amounts)
|
Unvested, January 31, 2016
|
2,212
|
|
$
|
16.66
|
|
Granted
(1)
|
646
|
|
$
|
20.51
|
|
Performance Shares Adjustment
(2)
|
(8
|
)
|
$
|
16.28
|
|
Vested
|
(771
|
)
|
$
|
17.31
|
|
Forfeited
|
(123
|
)
|
$
|
17.45
|
|
Unvested, July 30, 2016
|
1,956
|
|
$
|
17.62
|
|
|
|
(1)
|
There were approximately
0.3 million
RSUs with
three
-year performance conditions granted in the first quarter of 2016.
None
of these RSUs are currently included as granted in the table above. The number of performance-based RSUs that are ultimately earned may vary from
0%
to
200%
of target depending on the achievement of predefined financial performance targets.
|
|
|
(2)
|
Relates to a change in estimate of RSUs with performance conditions granted in 2015. Currently,
123%
of the number of shares granted in 2015 are expected to vest based on estimates against predefined financial performance targets.
|
The total fair value of RSUs and restricted stock that vested during the
twenty-six weeks ended July 30, 2016
was
$13.4 million
. As of
July 30, 2016
, there was approximately
$25.1 million
of total unrecognized compensation expense related to unvested RSUs and restricted stock, which is expected to be recognized over a weighted-average period of approximately
1.9
years.
10. Commitments and Contingencies
From time to time the Company is subject to various claims and contingencies arising out of the normal course of business. Management believes that the ultimate liability arising from such claims and contingencies, if any, is not likely to have a material adverse effect on the Company's results of operations, financial condition, or cash flows.
11. Stockholders' Equity
Share Repurchase Program
On December 9, 2015, the Board approved a new share repurchase program which authorizes the Company to repurchase up to
$100.0 million
of the Company's common stock during the 12 month period following the approval using available cash, including cash on hand or cash available for borrowing under the Company's Revolving Credit Facility (the "2015 Repurchase Program"). During the
twenty-six weeks ended July 30, 2016
, the Company repurchased
3.2 million
shares of its common stock under the 2015 Repurchase Program for an aggregate amount equal to
$51.5 million
, including commissions. The remaining amount available for repurchase under the 2015 Repurchase Program was
$20.0 million
as of
July 30, 2016
.
12. Investment in Equity Interests
In the
second quarter of 2016
, the Company made a
$10.0 million
investment, excluding legal fees, 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. The investment is included in other assets on the unaudited Consolidated Balance Sheets.