Express, Inc.
Q3 2020 Earnings Call Transcript

Published: 3 Dec 2020

[Operator:]

Good morning, ladies and gentlemen. Thank you for standing by and welcome to the Express Inc. Q3 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Dan Aldridge, VP Investor Relations. Please go ahead.

[Dan Aldridge:]

Thank you, Joey. Good morning and welcome to our call. I'd like to open by reminding you of the company's Safe Harbor provisions. Any statements made during this conference call, except those containing historical facts, may be deemed to constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual future results may differ materially from those suggested in forward-looking statements due to a number of risks and uncertainties, all of which are described in the company's filings with the SEC including today's press release. Express assumes no obligation to update any forward-looking statements or information except as required by law.

[Tim Baxter:]

Thanks, Dan, and good morning, everyone. Throughout 2020 we have advanced the EXPRESSway Forward strategy, and taken appropriate actions to manage our liquidity. In the third quarter, we intensified our focus on ecommerce demand. Transactions were up 17%, conversion was up 10%, and we delivered sequential improvement quarter-over-quarter. We shifted gears on product, driving down the high penetrations in occasion-based dress categories, and increasing the proportion of casual which outpaced our overall performance. We responded to depressed mall traffic by putting a sharp focus on conversion in our stores, and saw double-digit percent increases across each of our channels. We completed the first phase of our loyalty program relaunch, and added more members than last year, who we know spend three times the rate of nonmembers. We redirected our marketing dollars to drive brand awareness, resulting in a 77% increase in engagement across our paid social channels. We significantly enhanced our omni-channel capabilities, and our buy online pickup in-store demand grew by a factor of six times over the second quarter. We reduced our corporate workforce by an additional 10% to calibrate the organization through our improved operating model as we move into 2021. Our strategy is working. The foundational pillars of product, brand, customer, and execution are the right ones, our decisive action to bend the right ones. Our third quarter results are clearly not where I want them to be, but they are a reflection of the environment, and not a representation of the strength or power of our strategy. Now, let me provide a more detailed update on the key initiatives within those four strategic pillars. I'll start with product. Our historical strength has been in occasion-based dressing, so of course we have been disproportionately impacted over these last several months. Historically, the percentage of wear to work category specifically has had the highest inventory penetration in the third quarter, representing over 40%. We pulled back on our investment in the occasion-based categories, and have pushed forward with more casual, versatile categories, significantly changing their penetration versus a year ago. For example, in men's tops, we cancelled 500,000 units in dress shirts, our biggest category, and repurposed about half of that inventory with more casual, versatile chambray, flannel, and corduroy, which all saw very strong consumer adoption and higher sell-throughs.

[Perry Pericleous:]

Thank you, Tim. I'll start with our third quarter results, and then provide details on our ongoing liquidity actions. In order to provide more transparency in our results, I'll be referring to the normal year-over-year comparisons. Now we'll also make additional quarter-over-quarter remarks where those comparisons are relevant and meaningful. Third quarter net sales was $322 million, a 34% decrease as compared to $488 million last year. Retail sales decreased 38% and Express Factory outlet sales decreased 21%. Third quarter comparable sales were negative 30%, including retail, a negative 33% and outlet a negative 20%. Our sales continue to be materially impacted by COVID-19 in the third quarter, as traffic continues to be pressured, especially in our retail stores, where traffic has been consistently off by nearly 50% when compared to last year. In addition to the traffic challenges, our highly penetrated occasion based categories have also been a headwind. While our merchandise margin contracted by 1,250 basis points on a year-over-year basis, we saw sequential improvement compared to our second quarter results and also on a relative year-over-year basis and we expect these sequential improvements to continue into the fourth quarter and beyond. Buying and occupancy expense was down $10 million on an absolute dollar basis, but the leverage by 1,130 basis points due to the decline in sales.

[Tim Baxter:]

Thanks, Perry. The EXPRESSway Forward strategy is working. The changes we have made to the design and merchandising of our product, the positioning and messaging of our brand, the way in which we are engaging our customers, and our operating model are all working in concert to move us in the right direction. While we pay careful attention to the macro environment, and certainly the environment over these last many months has been unlike any other, the executive leadership team and I have remained focused on controlling the controllables across product, brand, customer, and execution. We're advancing on the EXPRESSway Forward and our destination remains the same to drive revenue by capturing market share and achieve a mid single-digit operating margin. Let me recap, 10 key takeaways from today's call. We identified over $440 million in liquidity actions in 2020, and we are also pursuing additional financing to provide flexibility in managing our liquidity going forward. We expect to receive $95 million in the second quarter of 2021 as a part of the CARES Act. Our new fashion deliveries, which fully reflect the Express viewpoint, have outpaced the balance of our assortment. We saw increased engagement with our marketing. We added more new customers to our loyalty program this year than last year in the third quarter. We enhanced our omni-channel capabilities and demand has grown six times for buy online pick-up in-store. 18% of these transactions have resulted in an incremental in-store purchase and increase conversion. We drove a 17% increase in online transactions in the third quarter. Conversion in the third quarter was up double digits across each of our channels. We completed an additional 10% reduction in our corporate workforce, and finally, we will be unveiling a bold new e-commerce strategy early in 2021. I am proud of the way this team has stayed on track and continued to execute against our strategy while navigating this prolonged pandemic and highly unusual environment. Let me wish all of you a very happy, very safe, and perhaps this year, more than ever, a very healthy holiday season. And now, we'll take the first question.

[Operator:]

Thank you. And your first question comes from the line of Marni Shapiro with Retail Tracker. Please go ahead.

[Marni Shapiro:]

Hey, guys. It's nice to see some of the progress on the fashion in the stores. Could you talk a little bit, I guess, pre this most recent surge in COVID, were you beginning to see your shopper, because you have a younger shopper who is a little bit more out and about. Were you starting to see your shopper come back a little bit more for some of the dress and fashion items? And have you seen, as COVID has surged, changes regionally in how sales and traffic have changed?

[Tim Baxter:]

Yes, good morning, Marni. Yes, the answer to your question is yes. There is certainly a correlation to where we see surges in COVID and the performance of our stores specifically in those markets, and the first part of your question, the answer is also yes. We have seen in, particularly in some specific markets some -- great success. I mean, as I said, the fashion product has exceeded my expectations, exceeded all of our expectations, and in those particular areas more occasion-based product is actually selling -- outpacing other areas where there are surges. So yes, we are seeing that.

[Marni Shapiro:]

That's fantastic, and then, could you also talk a little bit about even within the product that's a little bit more casual, are you seeing good reaction to things what I would call fashion casuals, so your embellished sweaters and fleece, and things like that, as opposed to just the basic fleece or it is all across all of casual?

[Tim Baxter:]

Well, I would say all of causal is clearly performing better right now than our historically big categories of more dressed up product, but when we embarked on this transformation I made a bold statement that we were going to get back to fashion leadership in the United States, and that is happening. Our customer is absolutely responding to the fashion product in a way that, as I said, has exceeded our expectations. So when you look at the casual product, the fashion product is absolutely selling through at a much higher rate. In fact, I wish we had more depth in some of that high fashion product, so yes. And particularly the product that you mentioned, the embellished sweatshirts and embellished loungewear has been fantastic, absolutely fantastic. So it is very clear that our customer, as we emerge from this, is going to respond extraordinarily well to the fashion product, and that our core categories will gain momentum, and we'll get that balance back.

[Marni Shapiro:]

Fantastic. Best of luck with the rest of the holiday season.

[Tim Baxter:]

Thank you, Marni.

[Operator:]

And your next comes from the line of Susan Anderson with B. Riley. Please go ahead.

[Susan Anderson:]

Hi, good morning, and thanks for taking my question. I was wondering if you could maybe give some color on just how November played our relative to October, and then also within November, I guess, how was the Black Friday week versus the rest of the month? I guess we're just hearing it was kind of pressured just given the store capacity constraints. Thanks.

[Tim Baxter:]

Yes, well, I would say, Susan, we don't typically comment intra quarter, but I will. These are -- but I'll qualify what I'm about to say with, these are extraordinarily uncertain times, and we see huge variations in trends based on what's happening. It's like I said to Marni, where you see surges, there is definitely a correlation between surges and restrictions, and how our stores perform in those regions, but I would say that November was very consistent with what we saw in the third quarter, and Black Friday was very consistent with what you've read, and what has been said. It's worth reminding everyone that stores were open last year -- most of our stores were open last year on Thursday, on Thanksgiving, and none of them were opened on Thursday this year. So obviously, in addition to the fact that reduced hours have been a challenge for us, that's a full day that -- not a full day, but an afternoon and evening that we were closed -- that we were open a year ago that we were closed this year, so obviously had a negative impact.

[Susan Anderson:]

Got it, okay, that's really helpful, and then maybe could you give some more color just on the merch margin in third quarter, and how promotional you were in third quarter versus your expectations? And then also what you're expecting for fourth quarter, the promotional environment and your merch margin?

[Perry Pericleous:]

Hi, Susan. From a merchandise margin standpoint, in the third quarter, we're down basis points, and obviously this was impacted by the overall promotional environment due to COVID as well as increased promotions in the back-half of the quarter due to the early start of the holiday season. The other factors that have impacted the merchandise margin is the overall increase in the online variable transactions due to the impact on our overall AOB that was discussed before. Overall, the Q3 promotional environment was pretty intense, and it was higher than initially anticipated. As we move into Q4, we're expecting to see continued improvement on a relative basis between Q4 of this year versus Q4 last year compared to, obviously, what happened in Q3, but we do expect the overall environment to continue to be very promotional.

[Susan Anderson:]

Okay, great, that's helpful, and then I guess lastly, I know you talked about some certain products, such as the men's polos, that were selling well. I guess I'm just kind of curious, I don't know if you could talk about, and just in terms sales growth or not, those categories or products that were doing much better relative to the rest of the group such as like maybe the casual lounge, and then if you could talk about how denim was doing versus the workwear just to kind of get a better idea of the products that were potentially selling better than those that obviously the consumers are not interested in right now?

[Tim Baxter:]

Yes, you sort of nailed the categories that are selling much better. In my comments I talked a lot about denim, and we have weeks where we are actually posting positive comps in denim. It's tough to offset what's happening in stores right now given the high penetration of stores to our business, but our denim business is very, very strong. Our business in casual and lounge particularly when it's done in our way, in a fashion way, as I said with Marni is fantastic, really good sell-throughs significantly outpacing the performance of other categories. Men's knits in particular, as I said, driving positive comps by the time we got to the end of the third quarter, and feeling confident about our ability to continue to drive men's knits very aggressively, and really importantly, particularly as we are moving into the fourth quarter, our sweater business has outpaced the performance of the total business pretty significantly too, and I would also note that even within sweaters we're certainly selling what I would describe as cozy and comfy and loungy sweaters, but our embellished sweaters have also been fantastic, which I guess makes perfect sense given that many celebrations this year are going to be much more at-home celebrations.

[Susan Anderson:]

Great, that's helpful. Thanks so much. Good luck this holiday.

[Tim Baxter:]

Thank you.

[Operator:]

And your next question comes from the line of Roxanne Meyer with MKM Partners. Please go ahead.

[Roxanne Meyer:]

Great, thanks. Good morning. My first question is on inventory. I was just wondering if you can help us better appreciate the composition of your inventory, where you expect them to end at the end of 4Q, and whether the spread in inventory versus sales you think will result in a continued significant degradation of merch margin in the 4Q? Thanks a lot.

[Perry Pericleous:]

Hi, Roxanne. So, from an inventory standpoint we have done a good job managing our inventory throughout the year, including faster liquidation of underperforming inventory and improving our overall inventory composition. In Q1, our inventory went down 6%, Q2 was down 14% and in Q3, we ended up 1%. The increase in inventory is driven by the continued pressures that we have seen on sales from the pandemic, and our decision to pull forward inventory from November into October of about $10 million, as well as about $5 million of inventory that is packed and held for the outlook business. When you look at the overall inventory composition, this time -- this year versus last year, our inventory composition is much better, and it reflects the Express Edit point of view from a merchandise standpoint. As I said earlier, we expect as we move on into Q4 to continue to see improvements on the relative basis on our merchandise margin as you know, Q4 is always extremely promotional time, but we do expect that we're going to continue to see improvements as it relates to your, I think one part of your question was, where do we expect inventory to be at the end of Q4, we expect inventory at the end of Q4 to be up, and that is a matter of performance from a sales standpoint, where it's going to exactly be.

[Tim Baxter:]

Roxanne, it's important to note here from my perspective that, while in my comments, I talked about cancellation of hundreds of thousands of units in categories, like Men's suits, Men's dress shirts, those are our largest categories in there, and as we continue to see steep declines in those categories, we own more inventory, even with those cancellations than I'd like, but the composition of that inventory is good. It's not inventory that is going to require aggressive markdowns, we're talking about navy and black and gray suits, and white and black and blue men's dress shirts. So from a health of the inventory, we feel good about the health of the inventory and the composition of the inventory, even though obviously, we'd like to have less inventory in some of those key categories right now.

[Roxanne Meyer:]

Okay, thanks. That color was certainly helpful, and then I guess, as it relates to the testing of our new smaller store format, I'm curious to know, what categories and skews you are reducing to represent kind of an Express new store model, and then, when you think about the opportunity there to roll out smaller stores. I know that over the last few years, you've renegotiated leases, and I'm assuming that you've got a good chunk of your stores that may actually be locked in and perhaps unable to relocate. So I'm just wondering if you could talk about the opportunity within your fleet. At this point, what percent you're able to maybe pursue in terms of a smaller store? Thanks.

[Tim Baxter:]

So, great question. Thanks, Roxanne. We still have a lot of flexibility within our mall based fleet, so as we have renegotiated leases, you may recall that we have renegotiated them on much shorter terms than what have historically been the terms of these leases, in order to maintain flexibility with our fleet. So, over 60% of our fleet is still actionable over the next few years, because of those shorter lease terms. So, the King of Prussia example that I gave is really encouraging to me because, we have proven that we can dramatically improve our productivity in a smaller format within the mall, but what's I think, more interesting and certainly going to be more relevant part of our strategy as we go forward, is these smaller format off-mall locations that we have just begun to test, the one that we're opening here in Columbus, which is about 1,500 square feet. So, obviously substantially smaller than any existing Express Store actually opens tomorrow and our approach with these smaller stores is actually an approach of learning. So, we'll be assorting them in different ways, at different times, actually just to see where we get the most traction, and it'll certainly be our intent to localize the assortments, so the store that we're opening up tomorrow hearing Columbus is actually going to be very gift focused. So it'll have a very holiday field, and then as we move out of a holiday, we will shift our focus to be a fashion forward focus for spring, but obviously very edited assortment, but we're also testing really exciting things like styling services in these locations. So, here in Columbus, our Eastern Flagship store is just a short distance away from this new smaller store. So, a customer will be able to make an appointment to meet with a stylist, and that stylist will be able to pull whatever product they believe that customer may like from that Eastern store and have it available for the customer to try on at a styling appointment in the smaller format store in Upper Arlington.

[Roxanne Meyer:]

Great.

[Tim Baxter:]

We'll be testing a whole bunch of different things with those smaller format stores.

[Roxanne Meyer:]

Great. Well, we look forward to hearing more about that. Sounds like an exciting opportunity, and best of luck for holiday.

[Tim Baxter:]

Great, thank you.

[Operator:]

And your next question comes from the line of Tony Giammalva with Sounds Energy. Please go ahead.

[Tony Giammalva:]

Hi, there. Thank you. Tim, could you address a little bit the liquidity situation, and just want to feel comfortable what the balance sheet is going to look like, and with the liquidity position is going to look back kind of in the March-April timeframe for next year, just to make sure you guys are still okay by the time we get there?

[Tim Baxter:]

Yes, absolutely, Tony. Thanks for the question, but what I would say is, we have clearly been effective managing our liquidity throughout this very prolonged pandemic, and we still have a number of levers available to us to continue managing our liquidity, including as I said in the script, and as Perry mentioned, potentially new financing opportunities, but also additional abatement and deferral, as we continue to negotiate with our landlords, and obviously we continue to look for and address any opportunity for cost savings, inventory reductions. So, I'm very confident in our ability to continue effectively managing our liquidity just as we have throughout the year.

[Tony Giammalva:]

It looks like you're going through like $50 million, $60 million of cash a quarter, is that about right?

[Perry Pericleous:]

Yes, as you know, our working capital fluctuates all the year. So, obviously that would depend on the time of the year and many other variables that will impact the cash burn. Obviously sales is a factor you know, that is part of that.

[Tony Giammalva:]

Okay. Well, I would think comparisons get a lot easier starting in February or March of next year.

[Perry Pericleous:]

Yes, they most certainly will.

[Tim Baxter:]

Yes.

[Tony Giammalva:]

Good luck.

[Tim Baxter:]

That's about the only thing that's certain right now.

[Operator:]

And there are no further questions at this time. This concludes today's conference call. You may now disconnect.