EXPRESS, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in Thousands, Except Per Share Amounts)
|
|
|
|
|
|
|
|
|
|
January 28, 2017
|
|
January 30, 2016
|
ASSETS
|
|
|
|
CURRENT ASSETS:
|
|
|
|
Cash and cash equivalents
|
$
|
207,373
|
|
|
$
|
186,903
|
|
Receivables, net
|
15,787
|
|
|
22,130
|
|
Inventories
|
241,424
|
|
|
255,350
|
|
Prepaid minimum rent
|
31,626
|
|
|
30,694
|
|
Other
|
17,923
|
|
|
18,342
|
|
Total current assets
|
514,133
|
|
|
513,419
|
|
|
|
|
|
PROPERTY AND EQUIPMENT
|
1,029,176
|
|
|
948,608
|
|
Less: accumulated depreciation
|
(577,890
|
)
|
|
(504,211
|
)
|
Property and equipment, net
|
451,286
|
|
|
444,397
|
|
|
|
|
|
TRADENAME/DOMAIN NAMES/TRADEMARKS
|
197,618
|
|
|
197,597
|
|
DEFERRED TAX ASSETS
|
7,926
|
|
|
21,227
|
|
OTHER ASSETS
|
14,226
|
|
|
2,004
|
|
Total assets
|
$
|
1,185,189
|
|
|
$
|
1,178,644
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
CURRENT LIABILITIES:
|
|
|
|
Accounts payable
|
$
|
172,668
|
|
|
$
|
149,884
|
|
Deferred revenue
|
29,428
|
|
|
30,895
|
|
Accrued expenses
|
80,301
|
|
|
126,624
|
|
Total current liabilities
|
282,397
|
|
|
307,403
|
|
|
|
|
|
DEFERRED LEASE CREDITS
|
146,328
|
|
|
139,236
|
|
OTHER LONG-TERM LIABILITIES
|
120,777
|
|
|
114,052
|
|
Total liabilities
|
549,502
|
|
|
560,691
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES (Note 13)
|
|
|
|
|
|
|
|
STOCKHOLDERS’ EQUITY:
|
|
|
|
Common stock – $0.01 par value; 500,000 shares authorized; 92,063 shares and 91,127 shares issued at January 28, 2017 and January 30, 2016, respectively, and 78,422 shares and 80,914 shares outstanding at January 28, 2017 and January 30, 2016, respectively
|
921
|
|
|
911
|
|
Additional paid-in capital
|
185,097
|
|
|
169,515
|
|
Accumulated other comprehensive loss
|
(3,803
|
)
|
|
(4,665
|
)
|
Retained earnings
|
690,715
|
|
|
633,298
|
|
Treasury stock – at average cost; 13,641 shares and 10,213 shares at January 28, 2017 and January 30, 2016, respectively
|
(237,243
|
)
|
|
(181,106
|
)
|
Total stockholders’ equity
|
635,687
|
|
|
617,953
|
|
Total liabilities and stockholders’ equity
|
$
|
1,185,189
|
|
|
$
|
1,178,644
|
|
See notes to consolidated financial statements.
EXPRESS, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Amounts in Thousands, Except Per Share Amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
NET SALES
|
$
|
2,192,547
|
|
|
$
|
2,350,129
|
|
|
$
|
2,165,481
|
|
COST OF GOODS SOLD, BUYING AND OCCUPANCY COSTS
|
1,529,343
|
|
|
1,554,852
|
|
|
1,504,527
|
|
Gross profit
|
663,204
|
|
|
795,277
|
|
|
660,954
|
|
OPERATING EXPENSES:
|
|
|
|
|
|
Selling, general, and administrative expenses
|
559,541
|
|
|
587,747
|
|
|
524,041
|
|
Other operating expense, net
|
62
|
|
|
292
|
|
|
316
|
|
Total operating expenses
|
559,603
|
|
|
588,039
|
|
|
524,357
|
|
|
|
|
|
|
|
OPERATING INCOME
|
103,601
|
|
|
207,238
|
|
|
136,597
|
|
|
|
|
|
|
|
INTEREST EXPENSE, NET
|
13,468
|
|
|
15,882
|
|
|
23,896
|
|
OTHER (INCOME) EXPENSE, NET
|
(484
|
)
|
|
672
|
|
|
1,145
|
|
INCOME BEFORE INCOME TAXES
|
90,617
|
|
|
190,684
|
|
|
111,556
|
|
INCOME TAX EXPENSE
|
33,200
|
|
|
74,171
|
|
|
43,231
|
|
NET INCOME
|
$
|
57,417
|
|
|
$
|
116,513
|
|
|
$
|
68,325
|
|
|
|
|
|
|
|
OTHER COMPREHENSIVE INCOME:
|
|
|
|
|
|
Foreign currency translation gain (loss)
|
862
|
|
|
(1,608
|
)
|
|
(2,329
|
)
|
COMPREHENSIVE INCOME
|
$
|
58,279
|
|
|
$
|
114,905
|
|
|
$
|
65,996
|
|
|
|
|
|
|
|
EARNINGS PER SHARE:
|
|
|
|
|
|
Basic
|
$
|
0.73
|
|
|
$
|
1.39
|
|
|
$
|
0.81
|
|
Diluted
|
$
|
0.73
|
|
|
$
|
1.38
|
|
|
$
|
0.81
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE SHARES OUTSTANDING:
|
|
|
|
|
|
Basic
|
78,669
|
|
|
83,980
|
|
|
84,144
|
|
Diluted
|
79,049
|
|
|
84,591
|
|
|
84,554
|
|
See notes to consolidated financial statements.
EXPRESS, INC.
CONSOLIDATED STATEMENT 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, February 1, 2014
|
83,966
|
|
$
|
899
|
|
$
|
130,511
|
|
$
|
448,460
|
|
$
|
(728
|
)
|
5,893
|
|
$
|
(104,573
|
)
|
$
|
474,569
|
|
Net income
|
—
|
|
—
|
|
—
|
|
68,325
|
|
—
|
|
—
|
|
—
|
|
68,325
|
|
Issuance of common stock
|
541
|
|
5
|
|
(5
|
)
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
Share-based compensation
|
—
|
|
—
|
|
19,283
|
|
—
|
|
—
|
|
—
|
|
—
|
|
19,283
|
|
Repurchase of common stock
|
(209
|
)
|
—
|
|
—
|
|
—
|
|
—
|
|
209
|
|
(3,509
|
)
|
(3,509
|
)
|
Foreign currency translation
|
—
|
|
—
|
|
—
|
|
—
|
|
(2,329
|
)
|
—
|
|
—
|
|
(2,329
|
)
|
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
|
|
See notes to consolidated financial statements.
EXPRESS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
Net income
|
$
|
57,417
|
|
|
$
|
116,513
|
|
|
$
|
68,325
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
Depreciation and amortization
|
82,144
|
|
|
74,904
|
|
|
76,437
|
|
Loss on disposal of property and equipment
|
942
|
|
|
1,561
|
|
|
1,530
|
|
Impairment charge
|
5,108
|
|
|
2,657
|
|
|
10,527
|
|
Amortization of lease financing obligation discount
|
11,354
|
|
|
—
|
|
|
—
|
|
Excess tax benefit from share-based compensation
|
—
|
|
|
(347
|
)
|
|
(49
|
)
|
Share-based compensation
|
12,858
|
|
|
18,438
|
|
|
19,326
|
|
Non-cash loss on extinguishment of debt
|
—
|
|
|
5,314
|
|
|
—
|
|
Deferred taxes
|
20,065
|
|
|
(10,700
|
)
|
|
6,291
|
|
Landlord allowance amortization
|
(11,280
|
)
|
|
(12,730
|
)
|
|
(11,369
|
)
|
Payment of original issue discount
|
—
|
|
|
(2,812
|
)
|
|
—
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
Receivables, net
|
6,371
|
|
|
1,097
|
|
|
(5,724
|
)
|
Inventories
|
14,144
|
|
|
(14,625
|
)
|
|
(28,989
|
)
|
Accounts payable, deferred revenue, and accrued expenses
|
(15,857
|
)
|
|
17,705
|
|
|
(886
|
)
|
Other assets and liabilities
|
3,442
|
|
|
32,628
|
|
|
21,151
|
|
Net cash provided by operating activities
|
186,708
|
|
|
229,603
|
|
|
156,570
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
Capital expenditures
|
(98,712
|
)
|
|
(115,343
|
)
|
|
(115,088
|
)
|
Purchase of intangible assets
|
(21
|
)
|
|
(35
|
)
|
|
(1,010
|
)
|
Investment in equity interests
|
(10,133
|
)
|
|
—
|
|
|
—
|
|
Net cash used in investing activities
|
(108,866
|
)
|
|
(115,378
|
)
|
|
(116,098
|
)
|
|
|
|
|
|
|
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
|
(1,595
|
)
|
|
(1,552
|
)
|
|
(1,478
|
)
|
Repayments of financing arrangements
|
(3,274
|
)
|
|
—
|
|
|
—
|
|
Excess tax benefit from share-based compensation
|
—
|
|
|
347
|
|
|
49
|
|
Proceeds from exercise of stock options
|
2,735
|
|
|
1,276
|
|
|
—
|
|
Repurchase of common stock under share repurchase programs (see Note 9)
|
(51,538
|
)
|
|
(68,574
|
)
|
|
—
|
|
Repurchase of common stock for tax withholding obligations
|
(4,599
|
)
|
|
(4,450
|
)
|
|
(3,509
|
)
|
Net cash used in financing activities
|
(58,271
|
)
|
|
(271,997
|
)
|
|
(4,938
|
)
|
|
|
|
|
|
|
|
|
EFFECT OF EXCHANGE RATE ON CASH
|
899
|
|
|
(1,484
|
)
|
|
(1,259
|
)
|
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
20,470
|
|
|
(159,256
|
)
|
|
34,275
|
|
CASH AND CASH EQUIVALENTS, Beginning of period
|
186,903
|
|
|
346,159
|
|
|
311,884
|
|
CASH AND CASH EQUIVALENTS, End of period
|
$
|
207,373
|
|
|
$
|
186,903
|
|
|
$
|
346,159
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
|
|
|
|
|
|
Cash paid for interest
|
$
|
—
|
|
|
$
|
8,787
|
|
|
$
|
17,574
|
|
Cash paid to taxing authorities
|
$
|
40,413
|
|
|
$
|
71,686
|
|
|
$
|
43,171
|
|
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
January 28, 2017
, Express operated
552
primarily mall-based retail stores in the United States, Canada, and Puerto Rico as well as
104
factory outlet stores. Additionally, the Company earned revenue from
18
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. During 2016, the Company closed
15
franchise stores in the Middle East and South Africa based on a strategic decision to exit its franchise agreements in these locations.
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
," "
2015
," and "
2014
" represent the 52-week periods ended
January 28, 2017
,
January 30, 2016
, and
January 31, 2015
, 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 an affiliate of Golden Gate Private Equity, Inc. 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 ("ASU") No. 2014-09, "Revenue from Contracts with Customers (Topic 606)." 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, 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 continues to evaluate the impact that adopting this standard will have on its consolidated financial statements, but currently expects that the adoption will primarily impact the accounting for points earned under the Company's loyalty program and the timing of revenue recognition for e-commerce sales. Neither of these changes is expected to have a material effect on the Company's financial position.
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.
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. 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, 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
January 28, 2017
and
January 30, 2016
, amounts due from banks for credit and debit card transactions totaled approximately
$10.2 million
and
$13.4 million
, respectively.
Outstanding checks not yet presented for payment amounted to
$49.8 million
and
$17.0 million
as of
January 28, 2017
and
January 30, 2016
, 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
January 28, 2017
and
January 30, 2016
, aggregated by the level in the fair value hierarchy within which those measurements fall.
|
|
|
|
|
|
|
|
|
|
|
|
January 28, 2017
|
|
Level 1
|
Level 2
|
Level 3
|
|
(in thousands)
|
Money market funds
|
$
|
177,551
|
|
$
|
—
|
|
$
|
—
|
|
|
|
|
January 30, 2016
|
|
Level 1
|
Level 2
|
Level 3
|
|
(in thousands)
|
Money market funds
|
$
|
152,069
|
|
$
|
—
|
|
$
|
—
|
|
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
January 28, 2017
and
January 30, 2016
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
January 28, 2017
or
January 30, 2016
.
Inventories
Inventories are principally valued at the lower of cost or market 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 market adjustment to inventory as of
January 28, 2017
and
January 30, 2016
was
$12.4 million
and
$9.9 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
$113.2 million
,
$110.5 million
, and
$104.6 million
in
2016, 2015, and 2014
, respectively. Advertising costs are included in selling, general, and administrative expenses in the Consolidated Statements of Income and Comprehensive Income.
Private Label Credit Card
The Company has an agreement with a third party to provide customers with private label credit cards (the “Card Agreement”). Each private label credit card bears the logo of the Express brand and can only be used at the Company's retail store locations and website. A third-party financing company is the sole owner of the accounts issued under the private label credit card program and absorbs the losses associated with non-payment by the private label card holders and a portion of any fraudulent usage of the accounts. Pursuant to the Card Agreement, the Company receives reimbursement funds from the third-party financing company for expenses the Company incurs based on usage of the private label credit cards. These reimbursement funds are used by the Company to fund marketing programs associated with the private label credit card and are recognized when the amounts are fixed or determinable and collectability is reasonably assured, which is generally at the time the private label credit cards are used or specified transactions occur. The funds received related to these private label credit cards are classified 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
2016
, as a result of decreased performance in certain stores, 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. In
2014
, the Company recognized impairment charges of
$10.5 million
related to
14
stores. Impairment charges are recorded in cost of goods sold, buying, and occupancy costs in the Consolidated Statements of Income and Comprehensive Income.
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
2016, 2015, or 2014
.
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. The 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.
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
$3.4 million
and
$21.2 million
as of
January 28, 2017
and
January 30, 2016
, respectively, and is included in accrued expenses 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.
Accrued Bonus
The Company pays bonuses to eligible associates based on performance targets being met. The accrued bonus liability was nominal and
$20.4 million
as of
January 28, 2017
and
January 30, 2016
, respectively and is included in accrued expenses on the Consolidated Balance Sheets.
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 is the functional currency for the Company's Canadian business. 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
$9.9 million
,
$13.3 million
, and
$11.3 million
in
2016, 2015, and 2014
, 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
$10.0 million
and
$9.9 million
as of
January 28, 2017
and
January 30, 2016
, 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
$27.5 million
and
$28.3 million
, as of
January 28, 2017
and
January 30, 2016
, 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
$3.6 million
,
$3.1 million
, and
$2.7 million
in
2016, 2015, and 2014
, 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
(in thousands)
|
Apparel
|
$
|
1,915,146
|
|
|
$
|
2,062,235
|
|
|
$
|
1,883,641
|
|
Accessories and other
|
236,024
|
|
|
242,408
|
|
|
240,052
|
|
Other revenue
|
41,377
|
|
|
45,486
|
|
|
41,788
|
|
Total net sales
|
$
|
2,192,547
|
|
|
$
|
2,350,129
|
|
|
$
|
2,165,481
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
(in thousands)
|
Stores
|
$
|
1,737,722
|
|
|
$
|
1,911,923
|
|
|
$
|
1,769,478
|
|
E-commerce
|
413,448
|
|
|
392,720
|
|
|
354,215
|
|
Other revenue
|
41,377
|
|
|
45,486
|
|
|
41,788
|
|
Total net sales
|
$
|
2,192,547
|
|
|
$
|
2,350,129
|
|
|
$
|
2,165,481
|
|
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
2016, 2015, and 2014
, and as of
January 28, 2017
and
January 30, 2016
, respectively, were not material and, therefore, not reported separately from domestic revenues and long-lived assets.
3. Property and Equipment, Net
Property and equipment, net, consisted of:
|
|
|
|
|
|
|
|
|
|
January 28, 2017
|
|
January 30, 2016
|
|
(in thousands)
|
Building improvements
|
$
|
86,487
|
|
|
$
|
86,487
|
|
Furniture, fixtures and equipment, software
|
487,381
|
|
|
378,041
|
|
Leasehold improvements
|
440,403
|
|
|
412,457
|
|
Construction in process
|
14,094
|
|
|
70,796
|
|
Other
|
811
|
|
|
827
|
|
Total
|
1,029,176
|
|
|
948,608
|
|
Less: accumulated depreciation
|
(577,890
|
)
|
|
(504,211
|
)
|
Property and equipment, net
|
$
|
451,286
|
|
|
$
|
444,397
|
|
Depreciation expense totaled
$81.5 million
,
$74.4 million
, and
$73.5 million
in
2016, 2015, and 2014
, respectively, excluding impairment charges discussed in Note 2.
4. Leased Facilities and Commitments
Annual store rent consists of a fixed minimum amount and/or contingent rent based on a percentage of sales exceeding a stipulated amount.
Rent expense is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Store rent:
|
(in thousands)
|
Fixed minimum
|
$
|
214,696
|
|
|
$
|
213,228
|
|
|
$
|
209,323
|
|
Contingent
|
4,927
|
|
|
6,945
|
|
|
6,398
|
|
Total store rent
|
219,623
|
|
|
220,173
|
|
|
215,721
|
|
Home office, distribution center, other
|
5,945
|
|
|
5,413
|
|
|
5,609
|
|
Total rent expense
|
$
|
225,568
|
|
|
$
|
225,586
|
|
|
$
|
221,330
|
|
As of
January 28, 2017
, the Company was committed to noncancelable leases with remaining terms from
1
to
15
years. A substantial portion of these commitments consist of store leases, generally with an initial term of
10
years. Store lease terms typically require additional payments covering real estate taxes, common area maintenance costs, and certain other landlord charges, which are excluded from the following table.
Minimum rent commitments under non-cancelable operating leases are as follows (in thousands):
|
|
|
|
|
2017
|
$
|
233,943
|
|
2018
|
200,800
|
|
2019
|
184,968
|
|
2020
|
173,416
|
|
2021
|
155,834
|
|
Thereafter
|
508,230
|
|
Total
|
$
|
1,457,191
|
|
5. 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 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 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. Once construction is complete, the Company considers the requirements for sale-leaseback treatment, including the transfer of all risks of ownership back to the landlord, and whether the Company has any continuing involvement in the leased property. If the arrangement does not qualify for sale-leaseback treatment, the building assets subject to these obligations remain on the Company's Consolidated Balance Sheets at their historical cost, and such assets are depreciated over their remaining useful lives. The replacement cost of the pre-existing building, as well as the costs of construction paid by the landlord, are recorded as lease financing obligations, and a portion of the lease payments are applied as payments of principal and interest. The interest rate selected for lease financing obligations is evaluated at lease inception based on the Company's incremental borrowing rate. At the end of the initial lease term, should the Company decide not to renew the lease, the Company would reverse equal amounts of the remaining net book value of the assets and the corresponding lease financing obligations.
The initial lease terms related to these lease arrangements are expected to expire in 2023 and 2030. The net book value of landlord funded construction, replacement cost of pre-existing property, and capitalized interest in property and equipment on the Consolidated Balance Sheets was
$63.8 million
and
$67.4 million
, as of
January 28, 2017
and
January 30, 2016
, respectively. There was also
$68.2 million
and
$69.6 million
of lease financing obligations as of
January 28, 2017
and
January 30, 2016
, respectively, in other long-term liabilities on the Consolidated Balance Sheets.
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 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 provided the landlord with the option to cancel the lease upon sufficient notice through December 31, 2016. The amendment expired unexercised on December 31, 2016. 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
January 28, 2017
, the fair value of the put option was
$9.0 million
of which
$8.3
million is included within other long-term liabilities on the Consolidated Balance Sheets. This amount will be amortized through interest expense over the remaining lease term.
6. Intangible Assets
The following table provides the significant components of intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 28, 2017
|
|
Cost
|
|
Accumulated
Amortization
|
|
Ending Net Balance
|
|
(in thousands)
|
Tradename/domain names/trademarks
|
$
|
197,618
|
|
|
$
|
—
|
|
|
$
|
197,618
|
|
Licensing arrangements
|
425
|
|
|
221
|
|
|
204
|
|
|
$
|
198,043
|
|
|
$
|
221
|
|
|
$
|
197,822
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 Consolidated Balance Sheets.
7. Income Taxes
The provision for income taxes consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Current:
|
(in thousands)
|
U.S. federal
|
$
|
7,600
|
|
|
$
|
72,222
|
|
|
$
|
29,884
|
|
U.S. state and local
|
4,721
|
|
|
12,425
|
|
|
6,491
|
|
Foreign
|
814
|
|
|
224
|
|
|
565
|
|
Total
|
13,135
|
|
|
84,871
|
|
|
36,940
|
|
Deferred:
|
|
|
|
|
|
U.S. federal
|
19,333
|
|
|
(8,715
|
)
|
|
6,884
|
|
U.S. state and local
|
866
|
|
|
(1,983
|
)
|
|
(558
|
)
|
Foreign
|
(134
|
)
|
|
(2
|
)
|
|
(35
|
)
|
Total
|
20,065
|
|
|
(10,700
|
)
|
|
6,291
|
|
Provision for income taxes
|
$
|
33,200
|
|
|
$
|
74,171
|
|
|
$
|
43,231
|
|
The following table provides a reconciliation between the statutory federal income tax rate and the effective tax rate:
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Federal income tax rate
|
35.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
State income taxes, net of federal income tax effect
|
4.4
|
%
|
|
3.6
|
%
|
|
4.1
|
%
|
Share-based compensation
|
4.0
|
%
|
|
0.2
|
%
|
|
0.8
|
%
|
(Benefit)/Expense for uncertain tax positions
|
(7.0
|
)%
|
|
0.5
|
%
|
|
(1.4
|
)%
|
Other items, net
|
0.2
|
%
|
|
(0.4
|
)%
|
|
0.3
|
%
|
Effective tax rate
|
36.6
|
%
|
|
38.9
|
%
|
|
38.8
|
%
|
The decrease in the tax rate in 2016 compared to 2015 is primarily attributable to the release of uncertain tax positions discussed further below, partially offset by the impact on the tax rate of share-based compensation due to the expiration of certain unexercised stock options previously held by the former Chairman of the Company's Board of Directors (the "Board").
The following table provides the effect of temporary differences that created deferred income taxes as of
January 28, 2017
and
January 30, 2016
. Deferred tax assets and liabilities represent the future effects on income taxes resulting from temporary differences and carry-forwards at the end of the respective periods.
|
|
|
|
|
|
|
|
|
|
January 28, 2017
|
|
January 30, 2016
|
|
(in thousands)
|
Deferred tax assets:
|
|
|
|
Accrued expenses and deferred compensation
|
$
|
28,340
|
|
|
$
|
40,540
|
|
Rent
|
31,170
|
|
|
28,551
|
|
Lease financing obligations
|
31,522
|
|
|
28,492
|
|
Inventory
|
3,005
|
|
|
1,778
|
|
Other
|
3,535
|
|
|
2,573
|
|
Tax credits/carryforwards
|
562
|
|
|
214
|
|
Valuation allowance
|
(3,243
|
)
|
|
(2,081
|
)
|
Total deferred tax assets
|
94,891
|
|
|
100,067
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
Prepaid expenses
|
5,189
|
|
|
4,976
|
|
Intangible assets
|
22,417
|
|
|
17,996
|
|
Property and equipment
|
66,124
|
|
|
55,868
|
|
Total deferred tax liabilities
|
93,730
|
|
|
78,840
|
|
Net deferred tax asset
|
$
|
1,161
|
|
|
$
|
21,227
|
|
The net increase in the total valuation allowance attributable to foreign operations for the years ended
January 28, 2017
, and
January 30, 2016
was
$1.0 million
and
$0.4 million
, respectively. The foreign capital loss carryforward as of
January 28, 2017
and
January 30, 2016
was
$0.3 million
and
$0.3 million
, respectively. The Company has established a full valuation allowance related to the foreign capital loss carryforward. The foreign capital loss carryforward period is indefinite. A valuation allowance of
$0.2
million was established related to state and local tax credits generated in the current year which have a one year carryforward period.
No other valuation allowances have been provided for deferred tax assets because management believes that it is more likely than not that the full amount of the net deferred tax assets will be realized in the future.
The following table summarizes the presentation of the Company’s net deferred tax assets in the Consolidated Balance Sheets:
|
|
|
|
|
|
|
|
|
|
January 28, 2017
|
|
January 30, 2016
|
|
(in thousands)
|
Deferred tax assets
|
$
|
7,926
|
|
|
$
|
21,227
|
|
Other long-term liabilities
|
(6,765
|
)
|
|
—
|
|
Net deferred tax assets
|
$
|
1,161
|
|
|
$
|
21,227
|
|
Uncertain Tax Positions
The Company evaluates tax positions using a more likely than not recognition criterion.
A reconciliation of the beginning to ending unrecognized tax benefits is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 28, 2017
|
|
January 30, 2016
|
|
January 31, 2015
|
|
(in thousands)
|
Unrecognized tax benefits, beginning of year
|
$
|
9,506
|
|
|
$
|
1,651
|
|
|
$
|
4,091
|
|
Gross addition for tax positions of the current year
|
296
|
|
|
767
|
|
|
346
|
|
Gross addition for tax positions of the prior year
|
527
|
|
|
7,174
|
|
|
129
|
|
Settlements
|
—
|
|
|
(57
|
)
|
|
(2,137
|
)
|
Reduction for tax positions of prior years
|
(23
|
)
|
|
(29
|
)
|
|
(628
|
)
|
Lapse of statute of limitations
|
(7,202
|
)
|
|
—
|
|
|
(150
|
)
|
Unrecognized tax benefits, end of year
|
$
|
3,104
|
|
|
$
|
9,506
|
|
|
$
|
1,651
|
|
The amount of the above unrecognized tax benefits as of
January 28, 2017
,
January 30, 2016
, and
January 31, 2015
that would impact the Company's effective tax rate, if recognized, is
$3.1 million
,
$9.5 million
, and
$1.7 million
, respectively.
During 2016, the Company released gross uncertain tax positions of
$7.2
million and the related accrued interest of
$0.9
million as a result of the expiration of associated statutes of limitation. During 2014, the Internal Revenue Service (IRS) completed its examination of the Company’s 2012, 2011, and 2010 income tax returns and the Company released gross uncertain tax positions of
$2.1 million
and the related accrued interest of
$0.1 million
as a result of the conclusion of this examination.
The Company recognizes accrued interest and penalties related to unrecognized tax benefits as a component of income tax expense. The total amount of net interest in tax expense related to interest and penalties included in the Consolidated Statements of Income and Comprehensive Income was
$(0.3) million
for 2016,
$0.7 million
for 2015, and immaterial for 2014. As of
January 28, 2017
and
January 30, 2016
, the Company had accrued interest of
$0.5 million
and
$0.8 million
, respectively.
The Company is subject to examination by the IRS for years subsequent to 2012. The Company is also generally subject to examination by various U.S. state and local and non-U.S. tax jurisdictions for the years subsequent to 2012. There are ongoing U.S. state and local audits covering tax years 2012 through 2015. The Company does not expect the results from any income tax audit to have a material impact on the Company’s financial statements.
The Company believes that over the next twelve months, it is reasonably possible that up to
$0.8 million
of unrecognized tax benefits could be resolved as the result of the expiration of statutes of limitation. Final settlement of these issues may result in payments that are more or less than this amount, but the Company does not anticipate that the resolution of these matters will result in a material change to its consolidated financial position or results of operations.
The Company’s Canadian subsidiary has an accumulated deficit; accordingly, we have not provided for income taxes in the United States on undistributed earnings.
8. Debt
A summary of the Company's financing activities are as follows:
Revolving Credit Facility
On May 20, 2015, Express Holding, a wholly-owned subsidiary, and its subsidiaries entered into an Amended and Restated
$250 million
secured Asset-Based Credit Facility ("Revolving Credit Facility"). The expiration date of the facility is May 20, 2020. As of
January 28, 2017
, there were
no
borrowings outstanding and approximately
$221.8 million
available under the Revolving Credit Facility.
Under the Revolving Credit Facility, revolving loans may be borrowed, repaid, and reborrowed until May 20, 2020, at which time all amounts borrowed must be repaid. The Revolving Credit Facility allows for a swingline sublimit of up to
$30.0 million
and for the issuance of letters of credit in the face amount of up to
$45.0 million
. Borrowings under the Revolving Credit Facility bear interest at a rate equal to either the rate appearing on Reuters Screen LIBOR01 page (the “Eurodollar Rate”) plus an applicable margin rate or the highest of (1) the prime lending rate, (2)
0.50%
per annum above the federal funds rate, and (3)
1%
above the Eurodollar Rate, in each case plus an applicable margin rate. The applicable margin rate is determined based on excess availability as determined by reference to the borrowing base. The applicable margin for Eurodollar Rate-based advances is between
1.50%
and
2.00%
based on the borrowing base. The unused line fee payable under the Revolving Credit Facility is incurred at
0.250%
per annum of the average daily unused revolving commitment during each quarter, payable quarterly in arrears on the first day of each May, August, November, and February. In the event that (1) an event of default has occurred and is continuing or (2) excess availability plus eligible cash collateral is less than
12.5%
of the borrowing base for
5
consecutive days, such unused line fees are payable on the first day of each month.
Interest payments under the Revolving Credit Facility are due quarterly on the first day of each May, August, November, and February for base rate-based advances, provided, however, in the event that (1) an event of default has occurred and is continuing or (2) excess availability plus eligible cash collateral is less than
12.5%
of the borrowing base for
5
consecutive days, interest payments are due on the first day of each month. Interest payments under the Revolving Credit Facility are due on the last day of the interest period for Eurodollar Rate-based advances for interest periods of 1, 2, and 3 months, and additionally every 3 months after the first day of the interest period for Eurodollar Rate-based advances for interest periods of greater than 3 months.
The Revolving Credit Facility requires Express Holding and its subsidiaries to maintain a fixed charge coverage ratio of at least
1.0
:
1.0
if excess availability plus eligible cash collateral is less than
10%
of the borrowing base for
15
consecutive days. In addition, the Revolving Credit Facility contains customary covenants and restrictions on Express Holding'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, wholly-owned subsidiaries of the Company, co-issued, in a private placement,
$250.0 million
of 8
3
/
4
% Senior Notes due in 2018 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 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 non-cash adjustments to reconcile net income to net cash provided by operating activities within the Consolidated Statements of Cash Flows.
Letters of Credit
The Company may enter into various trade letters of credit ("trade LCs") in favor of certain vendors to secure merchandise. These trade LCs are issued for a defined period of time, for specific shipments, and generally expire three weeks after the merchandise shipment date. As of
January 28, 2017
and
January 30, 2016
, there were
no
outstanding trade LCs. Additionally, the Company enters 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
January 28, 2017
and
January 30, 2016
, outstanding stand-by LCs totaled
$3.2 million
and
$2.8 million
, respectively.
9. Stockholders' Equity
Share Repurchase Programs
On December 9, 2015, the Board approved a share repurchase program which authorized the Company to repurchase up to
$100.0 million
of the Company's common stock (the "2015 Repurchase Program"). The 2015 Repurchase Program expired on December 9, 2016,
12
months after its adoption. In total, the Company repurchased
4.9 million
shares of its common stock under the 2015 Repurchase Program for an aggregate amount equal to
$80.1 million
, including commissions. During 2016, the Company repurchased
3.2 million
shares of its common stock for a total of
$51.5 million
including commissions. During 2015, the company repurchased
1.7 million
shares of its common stock under the 2015 Repurchase Program for an aggregate amount equal to
$28.6 million
, including commissions.
On May 28, 2014, the Board authorized the repurchase of up to
$100.0 million
of common stock (the "2014 Repurchase Program"). The 2014 Repurchase Program expired on November 28, 2015,
18
months after its adoption. In total, the Company repurchased
2.1 million
shares of its common stock under the 2014 Repurchase Program for an aggregate amount equal to
$40.0 million
, including commissions. All repurchases under the 2014 Repurchase Program were completed during 2015.
Stockholder Rights Plan
On June 12, 2014, the Board adopted a Stockholder Rights Plan (the “Rights Plan”). Under the Rights Plan, one right was distributed for each share of common stock outstanding at the close of business on June 23, 2014 and one right was to be issued for each new share of common stock issued thereafter. If any person or group acquired
10%
or more of the Company’s outstanding common stock without the approval of the Board, there would be a triggering event entitling a registered holder to purchase from the Company one one-hundredth of a share of Participating Preferred Stock, par value
$0.01
per share, for
$70.00
, subject to adjustment. Existing
10%
or greater stockholders were grandfathered to the extent of their June 12, 2014 ownership levels.
The Rights Plan was originally set to expire one year after it was adopted on June 12, 2015, but was amended on June 10, 2015 in order to extend the expiration date to June 10, 2016. On March 29, 2016, the Board further amended the Rights Plan to accelerate the expiration date to March 29, 2016, effectively terminating the Rights Plan as of that date.
10. Share-Based Compensation
The Company records the fair value of share-based payments to employees in the Consolidated Statements of Income and Comprehensive Income as compensation expense, net of forfeitures, over the requisite service period.
Share-Based Compensation Plans
In 2010, the Board approved, and the Company implemented, the Express, Inc. 2010 Incentive Compensation Plan (as amended, the "2010 Plan"). The 2010 Plan authorizes the Compensation Committee (the "Committee") of the Board and its designees to offer eligible employees and directors cash and stock-based incentives as deemed appropriate in order to attract, retain, and reward such individuals. Effective April 3, 2012, the Board amended the 2010 Plan to, among other things, reduce the number of shares available for issuance under the 2010 Plan. As of
January 28, 2017
,
15.2 million
shares were authorized to be granted under the 2010 Plan and
7.5 million
remained available for future issuance.
The following summarizes share-based compensation expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
(in thousands)
|
Stock options
|
$
|
2,464
|
|
|
$
|
3,399
|
|
|
$
|
7,556
|
|
Restricted stock units and restricted stock
|
10,394
|
|
|
15,039
|
|
|
11,770
|
|
Total share-based compensation
|
$
|
12,858
|
|
|
$
|
18,438
|
|
|
$
|
19,326
|
|
The stock compensation related income tax benefit recognized by the Company in
2016, 2015, and 2014
was
$6.2 million
,
$4.7 million
, and
$3.9 million
, respectively.
Stock Options
During
2016
, the Company granted stock options under the 2010 Plan. Stock options granted in
2016
under the 2010 Plan vest
25%
per year over
four
years or upon retirement if the holder has provided
10 years
of service and is at least
55 years
old at retirement. 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
2016
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Grant Date
Weighted Average
Exercise Price
|
|
Weighted-Average Remaining Contractual Life
(in years)
|
|
Aggregate Intrinsic Value
|
|
(in thousands, except per share amounts and years)
|
Outstanding, January 30, 2016
|
3,446
|
|
|
$
|
18.31
|
|
|
|
|
|
Granted
|
239
|
|
|
$
|
20.74
|
|
|
|
|
|
Exercised
|
(159
|
)
|
|
$
|
17.23
|
|
|
|
|
|
Forfeited or expired
|
(1,197
|
)
|
|
$
|
19.18
|
|
|
|
|
|
Outstanding, January 28, 2017
|
2,329
|
|
|
$
|
18.18
|
|
|
5.7
|
|
$
|
—
|
|
Expected to vest at January 28, 2017
|
522
|
|
|
$
|
18.30
|
|
|
8.1
|
|
$
|
—
|
|
Exercisable at January 28, 2017
|
1,787
|
|
|
$
|
18.14
|
|
|
4.9
|
|
$
|
—
|
|
The following provides additional information regarding the Company's stock options:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
(in thousands, except per share amounts)
|
Weighted average grant date fair value of options granted
|
$
|
9.32
|
|
|
$
|
7.79
|
|
|
$
|
8.49
|
|
Total intrinsic value of options exercised
|
$
|
547
|
|
|
$
|
176
|
|
|
$
|
—
|
|
As of
January 28, 2017
, there was approximately
$2.4 million
of total unrecognized compensation expense related to stock options, which is expected to be recognized over a weighted-average period of approximately
1.6
years.
The Company uses the Black-Scholes-Merton option-pricing model to value stock options granted to employees and directors. The Company's determination of the fair value of stock options is affected by the Company's stock price as well as a number of subjective and complex assumptions. These assumptions include the risk-free interest rate, the Company's expected stock price volatility over the term of the awards, expected term of the award, and dividend yield. The following are the weighted-average assumptions used in the determination of the fair value of the Company's stock options:
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Risk-free interest rate
(1)
|
1.62
|
%
|
|
1.60
|
%
|
|
1.86
|
%
|
Price Volatility
(2)
|
43.23
|
%
|
|
47.81
|
%
|
|
53.73
|
%
|
Expected term (years)
(3)
|
6.52
|
|
|
6.25
|
|
|
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. 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
2016
, the Company granted restricted stock units ("RSUs") under the 2010 Plan, including
0.3 million
RSUs with performance conditions. The fair value of the 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. Any of the RSUs granted during
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
2016
was as follows:
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Grant Date
Weighted Average
Fair Value
|
|
(in thousands, except per share amounts)
|
Unvested, January 30, 2016
|
2,212
|
|
|
$
|
16.66
|
|
Granted
(1)
|
678
|
|
|
$
|
20.14
|
|
Performance Shares Adjustment
(2)
|
(146
|
)
|
|
$
|
16.28
|
|
Vested
|
(812
|
)
|
|
$
|
17.24
|
|
Forfeited
|
(249
|
)
|
|
$
|
17.79
|
|
Unvested, January 28, 2017
|
1,683
|
|
|
$
|
17.64
|
|
|
|
(1)
|
Approximately
0.3 million
RSUs with
three
-year performance conditions were granted in the first quarter of 2016.
None
of these RSUs are currently included as granted in the table above based on current estimates against predefined performance targets. The number of performance-based RSUs that are ultimately earned may vary from
0%
to
200%
of target depending on achievement relative to the predefined financial performance targets.
|
|
|
(2)
|
Relates to a change in estimate of RSUs with performance conditions granted in 2015. Currently,
87%
of the number of shares granted in 2015 are expected to vest based on estimates against predefined financial performance targets.
|
The total fair value/intrinsic value of RSUs and restricted stock that vested was
$14.0 million
,
$11.2 million
, and
$13.4 million
, during
2016, 2015, and 2014
, respectively. As of
January 28, 2017
, there was approximately
$17.7 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
1.7
years.
11. 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:
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
(in thousands)
|
Weighted-average shares - basic
|
78,669
|
|
|
83,980
|
|
|
84,144
|
|
Dilutive effect of stock options, restricted stock units, and restricted stock
|
380
|
|
|
611
|
|
|
410
|
|
Weighted-average shares - diluted
|
79,049
|
|
|
84,591
|
|
|
84,554
|
|
Equity awards representing
3.7 million
,
2.4 million
, and
4.2 million
shares of common stock were excluded from the computation of diluted earnings per share for
2016, 2015, and 2014
, respectively, as the inclusion of these awards would have been anti-dilutive.
Additionally, for
2016
,
0.7 million
shares were excluded from the computation of diluted weighted average shares because the number of shares that will ultimately be issued is contingent on the Company's performance compared to pre-established performance goals which have not been achieved as of
January 28, 2017
.
12. Retirement Benefits
The employees of the Company, if eligible, participate in a qualified defined contribution retirement plan (the “Qualified Plan”) and a non-qualified supplemental retirement plan (the “Non-Qualified Plan”) sponsored by the Company.
Participation in the Company's Qualified Plan is available to employees who meet certain age and service requirements. The Qualified Plan permits employees to elect contributions up to the lesser of 15% of their compensation or the maximum limits allowable under the Internal Revenue Code ("IRC"). The Company matches employee contributions according to a pre-determined formula. Prior to 2014, the Company contributed additional discretionary amounts based on a percentage of the employees' eligible annual compensation and years of service. This discretionary contribution was discontinued effective for the 2014 plan year. Employee contributions and Company matching contributions vest immediately. Additional discretionary Company contributions and the related investment earnings are subject to vesting based on years of service.
Total expense recognized related to the Qualified Plan employer match was
$3.8 million
,
$3.8 million
, and
$3.1 million
in
2016, 2015, and 2014
, respectively.
Participation in the Non-Qualified Plan is made available to employees who meet certain age, service, job level, and compensation requirements. The Non-Qualified Plan is an unfunded plan which provides benefits beyond the IRC limits for qualified defined contribution plans. The plan permits employees to elect contributions up to a maximum percentage of eligible compensation. The Company matches employee contributions according to a pre-determined formula. The Non-Qualified Plan also previously credited additional amounts based on a percentage of the employees' eligible compensation and years of service, but this portion of the plan was discontinued effective for the 2014 plan year. In addition, the Non-Qualified Plan permits employees to defer additional compensation up to a maximum amount. The Company does not match the contributions for additional deferred compensation. Employees' accounts are credited with interest using a rate determined annually by the Retirement Plan Committee based on a methodology consistent with historical practices. Employee contributions and the related interest vest immediately. Company contributions and the related interest are subject to vesting based on years of service. Employees may elect an in-service distribution for the additional deferred compensation component only. Employees are not permitted to take a withdrawal from any other portion of the Non-Qualified Plan while actively employed with the Company. The remaining vested portion of employees' accounts in the Non-Qualified Plan will be distributed upon termination of employment in either a lump sum or in equal annual installments over a specified period of up to
10
years. Total expense recognized related to the Non-Qualified Plan was
$2.4 million
,
$2.2 million
, and
$1.5 million
in
2016, 2015, and 2014
, respectively.
The Company elected to account for this cash balance plan based on the participant account balances, excluding actuarial considerations, as permitted by the applicable authoritative guidance.
The annual activity for the Company's Non-Qualified Plan, was as follows:
|
|
|
|
|
|
|
|
|
|
January 28, 2017
|
|
January 30, 2016
|
|
(in thousands)
|
Balance, beginning of period
|
$
|
27,882
|
|
|
$
|
27,256
|
|
Contributions:
|
|
|
|
Employee
|
1,741
|
|
|
1,633
|
|
Company
|
951
|
|
|
746
|
|
Interest
|
1,507
|
|
|
1,436
|
|
Distributions
|
(2,339
|
)
|
|
(3,179
|
)
|
Forfeitures
|
(36
|
)
|
|
(10
|
)
|
Balance, end of period
|
$
|
29,706
|
|
|
$
|
27,882
|
|
These amounts are included in other long-term liabilities on the Consolidated Balance Sheets.
Subsequent to year-end, the Company elected to discontinue the Non-Qualified Plan effective March 31, 2017. Outstanding participant balances are expected to be distributed after a 12 month waiting period per IRS regulations regarding distributions from supplemental nonqualified plans. Interest will continue to accrue on outstanding balances until such distributions are made.
13. 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.
14. Quarterly Financial Data (Unaudited)
Summarized unaudited quarterly financial results for
2016
and
2015
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016 Quarter
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
|
(in thousands, except per share amounts)
|
Net sales
|
|
$
|
502,909
|
|
|
$
|
504,767
|
|
|
$
|
506,090
|
|
|
$
|
678,781
|
|
Gross profit
|
|
$
|
167,748
|
|
|
$
|
150,919
|
|
|
$
|
151,717
|
|
|
$
|
192,820
|
|
Net income
|
|
$
|
12,882
|
|
|
$
|
10,144
|
|
|
$
|
11,617
|
|
|
$
|
22,774
|
|
Earnings per basic share
|
|
$
|
0.16
|
|
|
$
|
0.13
|
|
|
$
|
0.15
|
|
|
$
|
0.29
|
|
Earnings per diluted share
|
|
$
|
0.16
|
|
|
$
|
0.13
|
|
|
$
|
0.15
|
|
|
$
|
0.29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015 Quarter
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
|
(in thousands, except per share amounts)
|
Net sales
|
|
$
|
502,378
|
|
|
$
|
535,582
|
|
|
$
|
546,616
|
|
|
$
|
765,553
|
|
Gross profit
|
|
$
|
166,444
|
|
|
$
|
177,190
|
|
|
$
|
191,089
|
|
|
$
|
260,554
|
|
Net income
|
|
$
|
13,062
|
|
|
$
|
21,028
|
|
|
$
|
26,307
|
|
|
$
|
56,116
|
|
Earnings per basic share
|
|
$
|
0.15
|
|
|
$
|
0.25
|
|
|
$
|
0.31
|
|
|
$
|
0.68
|
|
Earnings per diluted share
|
|
$
|
0.15
|
|
|
$
|
0.25
|
|
|
$
|
0.31
|
|
|
$
|
0.67
|
|