EXPRESS, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in Thousands, Except Per Share Amounts)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
July 29, 2017
|
|
January 28, 2017
|
ASSETS
|
|
|
|
CURRENT ASSETS:
|
|
|
|
Cash and cash equivalents
|
$
|
173,314
|
|
|
$
|
207,373
|
|
Receivables, net
|
14,948
|
|
|
15,787
|
|
Inventories
|
261,222
|
|
|
241,424
|
|
Prepaid minimum rent
|
30,187
|
|
|
31,626
|
|
Other
|
31,495
|
|
|
17,923
|
|
Total current assets
|
511,166
|
|
|
514,133
|
|
|
|
|
|
PROPERTY AND EQUIPMENT
|
1,029,902
|
|
|
1,029,176
|
|
Less: accumulated depreciation
|
(598,262
|
)
|
|
(577,890
|
)
|
Property and equipment, net
|
431,640
|
|
|
451,286
|
|
|
|
|
|
TRADENAME/DOMAIN NAMES/TRADEMARKS
|
197,618
|
|
|
197,618
|
|
DEFERRED TAX ASSETS
|
7,797
|
|
|
7,926
|
|
OTHER ASSETS
|
13,100
|
|
|
14,226
|
|
Total assets
|
$
|
1,161,321
|
|
|
$
|
1,185,189
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
CURRENT LIABILITIES:
|
|
|
|
Accounts payable
|
$
|
166,479
|
|
|
$
|
172,668
|
|
Deferred revenue
|
22,801
|
|
|
29,428
|
|
Accrued expenses
|
112,779
|
|
|
80,301
|
|
Total current liabilities
|
302,059
|
|
|
282,397
|
|
|
|
|
|
DEFERRED LEASE CREDITS
|
140,321
|
|
|
146,328
|
|
OTHER LONG-TERM LIABILITIES
|
89,885
|
|
|
120,777
|
|
Total liabilities
|
532,265
|
|
|
549,502
|
|
|
|
|
|
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; 92,632 shares and 92,063 shares issued at July 29, 2017 and January 28, 2017, respectively, and 78,802 shares and 78,422 shares outstanding at July 29, 2017 and January 28, 2017, respectively
|
926
|
|
|
921
|
|
Additional paid-in capital
|
192,552
|
|
|
185,097
|
|
Accumulated other comprehensive loss
|
—
|
|
|
(3,803
|
)
|
Retained earnings
|
674,382
|
|
|
690,715
|
|
Treasury stock – at average cost; 13,830 shares and 13,641 shares at July 29, 2017 and January 28, 2017, respectively
|
(238,804
|
)
|
|
(237,243
|
)
|
Total stockholders’ equity
|
629,056
|
|
|
635,687
|
|
Total liabilities and stockholders’ equity
|
$
|
1,161,321
|
|
|
$
|
1,185,189
|
|
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 29, 2017
|
|
July 30, 2016
|
|
July 29, 2017
|
|
July 30, 2016
|
NET SALES
|
$
|
478,536
|
|
|
$
|
504,767
|
|
|
$
|
945,565
|
|
|
$
|
1,007,676
|
|
COST OF GOODS SOLD, BUYING AND OCCUPANCY COSTS
|
347,066
|
|
|
353,848
|
|
|
687,097
|
|
|
689,009
|
|
Gross profit
|
131,470
|
|
|
150,919
|
|
|
258,468
|
|
|
318,667
|
|
OPERATING EXPENSES:
|
|
|
|
|
|
|
|
Selling, general, and administrative expenses
|
131,736
|
|
|
133,152
|
|
|
261,808
|
|
|
268,914
|
|
Restructuring costs
|
16,340
|
|
|
—
|
|
|
22,611
|
|
|
—
|
|
Other operating (income) expense, net
|
(724
|
)
|
|
(120
|
)
|
|
(323
|
)
|
|
45
|
|
Total operating expenses
|
147,352
|
|
|
133,032
|
|
|
284,096
|
|
|
268,959
|
|
|
|
|
|
|
|
|
|
OPERATING (LOSS)/INCOME
|
(15,882
|
)
|
|
17,887
|
|
|
(25,628
|
)
|
|
49,708
|
|
|
|
|
|
|
|
|
|
INTEREST EXPENSE, NET
|
696
|
|
|
547
|
|
|
1,493
|
|
|
12,278
|
|
OTHER (INCOME)/LOSS, NET
|
(525
|
)
|
|
196
|
|
|
(537
|
)
|
|
(494
|
)
|
(LOSS)/INCOME BEFORE INCOME TAXES
|
(16,053
|
)
|
|
17,144
|
|
|
(26,584
|
)
|
|
37,924
|
|
INCOME TAX (BENEFIT)/EXPENSE
|
(4,251
|
)
|
|
7,000
|
|
|
(10,251
|
)
|
|
14,898
|
|
NET (LOSS)/INCOME
|
$
|
(11,802
|
)
|
|
$
|
10,144
|
|
|
$
|
(16,333
|
)
|
|
$
|
23,026
|
|
|
|
|
|
|
|
|
|
OTHER COMPREHENSIVE INCOME:
|
|
|
|
|
|
|
|
Foreign currency translation gain/(loss)
|
(33
|
)
|
|
(549
|
)
|
|
(402
|
)
|
|
982
|
|
Amount reclassified to earnings
|
$
|
4,205
|
|
|
$
|
—
|
|
|
$
|
4,205
|
|
|
$
|
—
|
|
Other Comprehensive Income (Loss)
|
$
|
4,172
|
|
|
$
|
(549
|
)
|
|
$
|
3,803
|
|
|
$
|
982
|
|
COMPREHENSIVE (LOSS)/INCOME
|
$
|
(7,630
|
)
|
|
$
|
9,595
|
|
|
$
|
(12,530
|
)
|
|
$
|
24,008
|
|
|
|
|
|
|
|
|
|
EARNINGS PER SHARE:
|
|
|
|
|
|
|
|
Basic
|
$
|
(0.15
|
)
|
|
$
|
0.13
|
|
|
$
|
(0.21
|
)
|
|
$
|
0.29
|
|
Diluted
|
$
|
(0.15
|
)
|
|
$
|
0.13
|
|
|
$
|
(0.21
|
)
|
|
$
|
0.29
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE SHARES OUTSTANDING:
|
|
|
|
|
|
|
|
Basic
|
78,786
|
|
|
78,798
|
|
|
78,616
|
|
|
78,930
|
|
Diluted
|
78,786
|
|
|
78,945
|
|
|
78,616
|
|
|
79,429
|
|
See Notes to Unaudited Consolidated Financial Statements.
EXPRESS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in Thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
Twenty-Six Weeks Ended
|
|
July 29, 2017
|
|
July 30, 2016
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
Net (loss)/income
|
$
|
(16,333
|
)
|
|
$
|
23,026
|
|
Adjustments to reconcile net (loss)/income to net cash provided by operating activities:
|
|
|
|
Depreciation and amortization
|
45,258
|
|
|
36,365
|
|
Loss on disposal of property and equipment
|
1,256
|
|
|
875
|
|
Impairment charge
|
5,479
|
|
|
829
|
|
Amortization of lease financing obligation discount
|
—
|
|
|
11,354
|
|
Loss on deconsolidation of Canada
|
10,672
|
|
|
—
|
|
Share-based compensation
|
7,460
|
|
|
7,580
|
|
Deferred taxes
|
1,168
|
|
|
(283
|
)
|
Landlord allowance amortization
|
(6,537
|
)
|
|
(5,211
|
)
|
Other non-cash adjustments
|
(500
|
)
|
|
—
|
|
Changes in operating assets and liabilities:
|
|
|
|
Receivables, net
|
415
|
|
|
6,635
|
|
Inventories
|
(23,905
|
)
|
|
(1,011
|
)
|
Accounts payable, deferred revenue, and accrued expenses
|
(5,178
|
)
|
|
(37,350
|
)
|
Other assets and liabilities
|
(9,054
|
)
|
|
3,340
|
|
Net cash provided by operating activities
|
10,201
|
|
|
46,149
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
Capital expenditures
|
(30,154
|
)
|
|
(50,355
|
)
|
Decrease in cash and cash equivalents resulting from deconsolidation of Canada
|
(9,232
|
)
|
|
—
|
|
Purchase of intangible assets
|
—
|
|
|
(21
|
)
|
Investment in equity interests
|
—
|
|
|
(10,133
|
)
|
Net cash used in investing activities
|
(39,386
|
)
|
|
(60,509
|
)
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
Payments on lease financing obligations
|
(835
|
)
|
|
(785
|
)
|
Repayments of financing arrangements
|
(2,040
|
)
|
|
—
|
|
Proceeds from exercise of stock options
|
—
|
|
|
2,703
|
|
Repurchase of common stock under share repurchase program
|
—
|
|
|
(51,538
|
)
|
Repurchase of common stock for tax withholding obligations
|
(1,562
|
)
|
|
(4,403
|
)
|
Net cash used in financing activities
|
(4,437
|
)
|
|
(54,023
|
)
|
|
|
|
|
|
|
EFFECT OF EXCHANGE RATE ON CASH
|
(437
|
)
|
|
1,044
|
|
|
|
|
|
|
|
NET DECREASE IN CASH AND CASH EQUIVALENTS
|
(34,059
|
)
|
|
(67,339
|
)
|
CASH AND CASH EQUIVALENTS, Beginning of period
|
207,373
|
|
|
186,903
|
|
CASH AND CASH EQUIVALENTS, End of period
|
$
|
173,314
|
|
|
$
|
119,564
|
|
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 29, 2017
, Express operated
503
primarily mall-based retail stores in the United States and Puerto Rico as well as
132
factory outlet stores. Additionally, as of
July 29, 2017
, 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.
On May 4, 2017, Express announced its intention to exit the Canadian market and Express Fashion Apparel Canada Inc. and
one
of its wholly owned subsidiaries filed for protection in Canada under the Companies' Creditors Arrangement Act (CCAA) with the Ontario Superior Court of Justice in Toronto. As of May 4, 2017, Canadian retail operations were deconsolidated from the Company's financial statements. Canadian financial results prior to May 4, 2017 are included in the Company's consolidated financial statements. See Note 12 for additional information.
Fiscal Year
The Company's fiscal year ends on the Saturday closest to January 31. Fiscal years are referred to by the calendar year in which the fiscal year commences. References herein to "
2017
" and "
2016
" represent the 53-week period ended
February 3, 2018
and the 52-week period ended
January 28, 2017
. All references herein to "the
second quarter of 2017
" and "the
second quarter of 2016
" represent the thirteen weeks ended
July 29, 2017
and
July 30, 2016
, 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
2017
. Therefore, these statements should be read in conjunction with the Consolidated Financial Statements and Notes thereto for the year ended
January 28, 2017
, included in the Company's Annual Report on Form 10-K, filed with the SEC on
March 24, 2017
.
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, "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 will adopt ASU 2014-09 in the first quarter of fiscal 2018 and is still selecting a method of adoption. In addition, 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 customer 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, however there are enhanced disclosure requirements under this standard.
In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)." ASU 2016-02 requires entities to recognize lease assets and lease liabilities on the balance sheet and to disclose key information about leasing arrangements. Under ASU 2016-02, a lessee should recognize a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term on its balance sheet. The new standard is effective for annual and interim periods beginning after December 15, 2018. ASU 2016-02 mandates a modified retrospective transition method with early adoption permitted. The Company continues to evaluate the impact that adopting ASU 2016-02 will have on its consolidated financial statements, but the most significant impact will be to increase assets and liabilities on the consolidated balance sheet by the present value of the Company's leasing obligations, which are primarily related to store leases, as well as additional disclosures required.
2. 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 29, 2017
|
|
July 30, 2016
|
|
July 29, 2017
|
|
July 30, 2016
|
|
(in thousands)
|
|
(in thousands)
|
Apparel
|
$
|
421,433
|
|
|
$
|
438,848
|
|
|
$
|
830,011
|
|
|
$
|
880,091
|
|
Accessories and other
|
50,898
|
|
|
54,010
|
|
|
97,671
|
|
|
106,662
|
|
Other revenue
|
6,205
|
|
|
11,909
|
|
|
17,883
|
|
|
20,923
|
|
Total net sales
|
$
|
478,536
|
|
|
$
|
504,767
|
|
|
$
|
945,565
|
|
|
$
|
1,007,676
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
Twenty-Six Weeks Ended
|
|
July 29, 2017
|
|
July 30, 2016
|
|
July 29, 2017
|
|
July 30, 2016
|
|
(in thousands)
|
|
(in thousands)
|
Stores
|
$
|
382,376
|
|
|
$
|
422,804
|
|
|
$
|
740,155
|
|
|
$
|
839,706
|
|
E-commerce
|
89,955
|
|
|
70,054
|
|
|
187,527
|
|
|
147,047
|
|
Other revenue
|
6,205
|
|
|
11,909
|
|
|
17,883
|
|
|
20,923
|
|
Total net sales
|
$
|
478,536
|
|
|
$
|
504,767
|
|
|
$
|
945,565
|
|
|
$
|
1,007,676
|
|
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
July 29, 2017
and
July 30, 2016
, 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 29, 2017
|
|
July 30, 2016
|
|
July 29, 2017
|
|
July 30, 2016
|
|
(in thousands)
|
Weighted-average shares - basic
|
78,786
|
|
|
78,798
|
|
|
78,616
|
|
|
78,930
|
|
Dilutive effect of stock options and restricted stock units
|
—
|
|
|
147
|
|
|
—
|
|
|
499
|
|
Weighted-average shares - diluted
|
78,786
|
|
|
78,945
|
|
|
78,616
|
|
|
79,429
|
|
Equity awards representing
4.7 million
shares of common stock were excluded from the computation of diluted earnings per share for the
thirteen and twenty-six weeks ended
July 29, 2017
, as the inclusion of these awards would have been anti-dilutive. Equity awards representing
4.4 million
and
3.4 million
shares of common stock were excluded from the computation 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.
Additionally, for the
thirteen and twenty-six weeks ended
July 29, 2017
,
1.4 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
July 29, 2017
.
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 29, 2017
and
January 28, 2017
, aggregated by the level in the fair value hierarchy within which those measurements fall.
|
|
|
|
|
|
|
|
|
|
|
|
July 29, 2017
|
|
Level 1
|
Level 2
|
Level 3
|
|
(in thousands)
|
Money market funds
|
$
|
141,813
|
|
$
|
—
|
|
$
|
—
|
|
|
|
|
January 28, 2017
|
|
Level 1
|
Level 2
|
Level 3
|
|
(in thousands)
|
Money market funds
|
$
|
177,551
|
|
$
|
—
|
|
$
|
—
|
|
The carrying amounts reflected on the unaudited Consolidated Balance Sheets for cash, cash equivalents, receivables, prepaid expenses, and payables as of
July 29, 2017
and
January 28, 2017
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 weeks ended July 29, 2017
the Company did
no
t recognize any impairment charges. During the
twenty-six weeks ended July 29, 2017
, the Company recognized impairment charges of approximately
$5.5 million
related to its
17
Canadian stores, all of which are now closed and fully impaired. These charges are included in restructuring costs on the unaudited Consolidated Statements of Income. See Note 12 for additional discussion regarding the exit from Canada. During the
thirteen and twenty-six weeks ended
July 30, 2016
, the Company recognized impairment charges of
$0.8 million
related to
two
stores.
5. Intangible Assets
The following table provides the significant components of intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 29, 2017
|
|
Cost
|
|
Accumulated
Amortization
|
|
Ending Net Balance
|
|
(in thousands)
|
Tradename/domain names/trademarks
|
$
|
197,618
|
|
|
$
|
—
|
|
|
$
|
197,618
|
|
Licensing arrangements
|
425
|
|
|
245
|
|
|
180
|
|
|
$
|
198,043
|
|
|
$
|
245
|
|
|
$
|
197,798
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
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.
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 income tax rate may fluctuate from quarter to quarter as a result of a variety of factors, including changes in the Company's assessment of certain tax contingencies, valuation allowances, changes in tax law, outcomes of administrative audits, the impact of discrete items, and the mix of earnings.
The Company's effective tax rate was
26.5%
and
40.8%
for the
thirteen weeks ended July 29, 2017
and
July 30, 2016
, respectively. The Company’s effective tax rate was
38.6%
and
39.3%
for the twenty-six weeks ended July 29, 2017 and July 30, 2016, respectively. The effective tax rate for the thirteen weeks ended July 29, 2017 reflects
$1.6 million
of discrete tax expense related to the cumulative translation loss reclassified to earnings as part of the Canadian exit which is more fully described in Note 12. The total tax impact of the Canadian exit for the
thirteen weeks ended July 29, 2017
was a
$5.1 million
benefit.
The effective tax rate for the twenty-six weeks ended July 29, 2017 also reflects
$5.0 million
of discrete tax benefit related to our exit from Canada recorded in the first quarter of 2017. This consisted of a
$7.3 million
tax benefit related to the write-off of Express’ excess tax basis in its investment in Canada and a
$2.3 million
tax expense primarily related to an increase in the valuation allowance as a result of asset impairment. This net benefit was partially offset by discrete charges of
$2.2 million
related to a tax shortfall for share-based compensation during the
twenty-six weeks ended July 29, 2017
and
$1.2 million
for a
valuation allowance that was recorded against the deferred tax asset for deferred compensation. The total deferred tax asset for deferred compensation of
$11.4 million
, less the estimated valuation allowance of
$1.2 million
, will be realized upon payout of amounts to participants in the Company's non-qualified supplemental retirement plan that was terminated in the first quarter of 2017. See Note 13 for additional information regarding the termination.
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
$62.0 million
and
$63.8 million
, as of
July 29, 2017
and
January 28, 2017
, respectively. There was also
$67.5 million
and
$68.2 million
of lease financing obligations as of
July 29, 2017
and
January 28, 2017
, respectively, in other long-term liabilities on the unaudited 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 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 amendment provided the landlord with the option to cancel the lease upon sufficient notice through December 31, 2016. The option was never exercised and therefore expired 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
July 29, 2017
, the put option was
$8.6 million
of which
$7.9 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.
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 29, 2017
, there were
no
borrowings outstanding and approximately
$246.8 million
was available for borrowing 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.
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 29, 2017
and
January 28, 2017
, outstanding stand-by LCs totaled
$3.2 million
.
9. Share-Based Compensation
The Company records the fair value of share-based payments to employees in the unaudited Consolidated Statements of 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 29, 2017
|
|
July 30, 2016
|
|
July 29, 2017
|
|
July 30, 2016
|
|
(in thousands)
|
Restricted stock units
|
$
|
3,051
|
|
|
$
|
2,695
|
|
|
$
|
6,206
|
|
|
$
|
6,000
|
|
Stock options
|
391
|
|
|
517
|
|
|
1,254
|
|
|
1,580
|
|
Total share-based compensation
|
$
|
3,442
|
|
|
$
|
3,212
|
|
|
$
|
7,460
|
|
|
$
|
7,580
|
|
The stock compensation related income tax benefit recognized by the Company during the
thirteen and twenty-six weeks ended
July 29, 2017
was
$0.2 million
and
$2.1 million
, respectively. 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.
Stock Options
During the
twenty-six weeks ended July 29, 2017
, the Company granted stock options under the Company's Amended and Restated 2010 Incentive Compensation Plan (the "2010 Plan"). Stock options granted in
2017
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
of age. 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 29, 2017
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 28, 2017
|
2,329
|
|
|
$
|
18.18
|
|
|
|
|
|
Granted
|
493
|
|
|
$
|
9.42
|
|
|
|
|
|
Exercised
|
—
|
|
|
$
|
—
|
|
|
|
|
|
Forfeited or expired
|
(151
|
)
|
|
$
|
18.01
|
|
|
|
|
|
Outstanding, July 29, 2017
|
2,671
|
|
|
$
|
16.57
|
|
|
6.1
|
|
$
|
—
|
|
Expected to vest at July 29, 2017
|
745
|
|
|
$
|
13.20
|
|
|
9.0
|
|
$
|
—
|
|
Exercisable at July 29, 2017
|
1,871
|
|
|
$
|
18.07
|
|
|
4.8
|
|
$
|
—
|
|
The following table provides additional information regarding the Company's stock options:
|
|
|
|
|
|
|
|
|
|
Twenty-Six Weeks Ended
|
|
July 29, 2017
|
|
July 30, 2016
|
|
(in thousands, except per share amounts)
|
Weighted average grant date fair value of options granted (per share)
|
$
|
4.39
|
|
|
$
|
9.50
|
|
Total intrinsic value of options exercised
|
$
|
—
|
|
|
$
|
536
|
|
As of
July 29, 2017
, there was approximately
$3.1 million
of total unrecognized compensation expense related to stock options, which is expected to be recognized over a weighted average period of approximately
1.8
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 29, 2017
|
|
July 30, 2016
|
Risk-free interest rate
(1)
|
2.27
|
%
|
|
1.60
|
%
|
Price volatility
(2)
|
45.53
|
%
|
|
43.15
|
%
|
Expected term (years)
(3)
|
6.10
|
|
|
6.54
|
|
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)
|
Calculated 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 granted employee stock options.
|
|
|
(4)
|
The Company does not currently plan on paying regular dividends.
|
Restricted Stock Units
During the
twenty-six weeks ended July 29, 2017
, the Company granted restricted stock units ("RSUs") under the 2010 Plan, including
0.8 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 29, 2017
that are earned based on the achievement of performance criteria will vest on April 15, 2020. RSUs without performance conditions vest ratably over
four
years.
The Company's activity with respect to RSUs, including awards with performance conditions, for the
twenty-six weeks ended July 29, 2017
was as follows:
|
|
|
|
|
|
|
|
Number of
Shares
|
Grant Date
Weighted Average
Fair Value Per Share
|
|
(in thousands, except per share amounts)
|
Unvested, January 28, 2017
|
1,683
|
|
$
|
17.64
|
|
Granted
(1)
|
2,112
|
|
$
|
9.23
|
|
Performance Shares Adjustment
(2)
|
(25
|
)
|
$
|
—
|
|
Vested
|
(569
|
)
|
$
|
17.22
|
|
Forfeited
|
(130
|
)
|
$
|
12.93
|
|
Unvested, July 29, 2017
|
3,071
|
|
$
|
12.15
|
|
|
|
(1)
|
Approximately
0.8 million
RSUs with
three
-year performance conditions were granted in the first quarter of 2017.
One
hundred percent 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,
80%
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 that vested during the
twenty-six weeks ended July 29, 2017
was
$9.8 million
. As of
July 29, 2017
, there was approximately
$27.5 million
of total unrecognized compensation expense related to unvested RSUs, which is expected to be recognized over a weighted-average period of approximately
2.0
years.
10. Commitments and Contingencies
In a complaint filed on January 31, 2017 in the Superior Court for the State of California for the County of Orange, certain subsidiaries of the Company were named as defendants in a representative action alleging violations of California state wage and hour statutes and other labor standards. The lawsuit seeks unspecified monetary damages and attorneys' fees. Express is vigorously defending these claims. At this time, Express is not able to predict the outcome of this lawsuit or the amount of any loss that may arise from it.
The Company is subject to various other claims and contingencies arising out of the normal course of business. Management believes that the ultimate liability arising from such claims and contingencies, if any, is not likely to have a material adverse effect on the Company's results of operations, financial condition, or cash flows.
11. Investment in Equity Interests
In the second quarter of 2016, the Company made a
$10.1 million
investment in Homage, LLC, a privately held retail company based in Columbus, Ohio. The non-controlling investment in the entity is being accounted for under the equity method. Under the terms of the agreement governing the investment, the Company's investment was increased by
$0.5 million
during the second quarter of 2017 as the result of an accrual of a non-cash preferred yield. The total
$10.6 million
investment is included in other assets on the unaudited Consolidated Balance Sheets.
12. Restructuring Costs
In April of 2017, Express made the decision to close all
17
of its retail stores in Canada and discontinue all operations through its Canadian subsidiary, Express Fashion Apparel Canada Inc. ("Express Canada"). In connection with the plan to close all of its Canadian stores, on May 4, 2017, certain of Express, Inc.’s Canadian subsidiaries filed an application with the Ontario Superior Court of Justice (Commercial List) in Toronto seeking protection for Express, Inc.’s Canadian subsidiaries under the Companies’ Creditors Arrangement Act in Canada (the "Filing") and the appointment of a monitor to oversee the liquidation and wind-down process. Express Canada began conducting store closing liquidation sales in the middle of May and closed all of its Canadian stores in June of 2017.
Asset Impairment
As a result of the decision to close the Canadian stores, Express determined that it was more likely than not that the fixed assets associated with the Canadian stores would be sold or otherwise disposed of prior to the end of their useful lives and therefore evaluated these assets for impairment in the first quarter of 2017. As a result of this evaluation, the Company recognized an impairment charge of
$5.5 million
on the fixed assets in the first quarter of 2017.
Exit Costs
As of May 4, 2017, the date of the Filing, the Company no longer had a controlling interest in the Canadian subsidiaries and therefore it deconsolidated the Canadian operations from the Company's consolidated financial statements as of such date. In addition to the impairment charges noted above, during the first quarter of 2017 the Company also incurred
$0.8 million
in restructuring costs for professional fees. During the second quarter of 2017, the Company recorded additional restructuring costs of
$16.3 million
. In addition, the Company recorded a lower of cost or market adjustment in the amount of
$1.3 million
in cost of goods sold on the unaudited Consolidated Statements of Income related to inventory on hand specifically related to Canada. See Note 6 for the income tax impact of the discontinuation of Canadian operations.
The following provides additional detail regarding the restructuring costs incurred in the second quarter as well as a roll-forward of the amounts accrued:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrual as of April 29, 2017
|
|
Second Quarter Expense
|
|
Second Quarter Amounts Paid
|
|
Accrual as of July 29, 2017
|
|
(in thousands)
|
Professional fees
|
$
|
463
|
|
|
$
|
268
|
|
|
$
|
(603
|
)
|
|
$
|
128
|
|
Write-off of investment in Express Canada
|
|
|
6,467
|
|
|
|
|
|
Lease related accruals
|
—
|
|
|
5,400
|
|
|
—
|
|
|
5,400
|
|
Cumulative translation loss reclassed to earnings
|
—
|
|
|
4,205
|
|
|
—
|
|
|
—
|
|
|
463
|
|
|
16,340
|
|
|
(603
|
)
|
|
5,528
|
|
In addition to the amounts paid in the second quarter as noted in the preceding table, the Company incurred a cash loss in the amount of
$9.2 million
. This amount reflected the cash and cash equivalents balance held by Express Canada at the time of deconsolidation and is a component of the write-off of the investment in Express Canada.
The Company does not expect to incur significant additional restructuring costs and expects to make the majority of the remaining cash payments within the next 12 months.
13. Retirement Benefits
Certain eligible employees participate in a non-qualified supplemental retirement plan (the “Non-Qualified Plan”) sponsored by the Company. In the first quarter of 2017, the Company elected to terminate the Non-Qualified Plan effective March 31, 2017. Outstanding participant balances are expected to be distributed via lump sum 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. As a result of this decision, the liability associated with this plan was reclassified from other long-term liabilities to accrued expenses in 2017. The balance was
$25.9 million
as of July 29, 2017. The Company continues to sponsor a qualified defined contribution retirement plan for eligible employees.
14. Subsequent Events
On August 28, 2017, the Company amended its existing Private Label Credit Card Program Agreement (the “Amendment”) with Comenity Bank (the “Bank”) to extend the term of the arrangement through December 31, 2024 (as amended, the “Agreement”).
Pursuant to the Agreement, Bank continues to have the exclusive right to provide private label credit cards to Company’s customers. In connection with the Amendment, the Bank has agreed to pay the Company (1) a
$20.0 million
dollar refundable payment which the Company will recognize upon receipt as deferred revenue in the consolidated balance sheet and recognize into income on a straight-line basis commencing in January of 2018 over the term of the Agreement within the other revenue component of net sales, and (2) a total of
$7.1 million
in non-refundable payments during the remainder of fiscal year 2017 intended to offset certain marketing and other costs related to the private label credit card program. The Company currently expects to recognize the
$7.1 million
in the third and fourth quarter of 2017 as costs are incurred. The Company will recognize any amounts received in excess of such costs on a straight-line basis over the term of the Agreement.
In addition to these payments, the Company will continue to receive amounts from the Bank during the term of the Agreement based on a percentage of private label credit card sales and is also eligible to receive incentive payments for the achievement of certain performance targets and reimbursement for certain costs.