Express, Inc.
Q4 2020 Earnings Call Transcript

Published: 10 Mar 2021

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to the Express, Inc. Q4 2020 Earnings Call. It is now my pleasure to turn the call over to your speaker today, Mr. Dan Aldridge, VP, Investor Relations. Please go ahead.

[Dan Aldridge:]

Thank you, and 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:]

Thank you, Dan, and good morning, everyone. In the fourth quarter and throughout 2020, we have successfully advanced the EXPRESSway Forward strategy and taken decisive appropriate actions to effectively manage our liquidity. We intensified our focus on eCommerce demand and traffic, transactions and conversion have all increased. We shifted gears on product, driving down high penetrations in occasion-based categories and driving up the percentage of more versatile ones, and they outpaced our overall performance. We completed the first phase of our loyalty program relaunch and added 8% more new members than last year, who we expect will generate meaningful incremental value because they generally spend at 2x the rate of nonmembers. We reallocated our marketing dollars to drive greater brand awareness and saw a 54% increase in engagement across our paid social channels. We responded to significant declines in mall traffic by sharpening our focus on conversion and saw increases across all of our channels. We reduced $250 million in cost through expense reductions, capital reductions and inventory cuts. We secured $140 million in additional financing. And we negotiated $85 million in savings through rent abatements, deferrals and reductions. Our strategy is the right one. And we will continue to advance its four foundational pillars while being agile in response to the accelerated pace of consumer and marketplace change. Our fourth quarter results do not reflect where our business is headed. Store traffic continues to be materially affected by the pandemic. However, our comp sales did improve sequentially from the third quarter to the fourth quarter, our gross margin improved significantly from the third quarter and I expect these trends to continue in the first quarter and throughout 2021. We also saw encouraging trends in the Southeast, where coronavirus guidelines were less restrictive. Comps were, on average, 20 points better than in the more restrictive Northeast and California markets.

[Perry Pericleous:]

Thank you, Tim. In 2020, we focused on controlling the controllable in order to build a strong foundation and maintain liquidity throughout an unusually difficult year. As Tim just said, we finalized negotiations with a majority of our landlords and negotiated $85 million in rent abatements, deferral and future rent reductions. We reduced expenses by $35 million and secured $140 million in additional financing. So our foundation is stronger, and we are back on the EXPRESSway Forward. I will now discuss our fourth quarter and full year results, provide details on our liquidity action and then provide a high-level outlook for 2021. My comments today will refer to the usual year-over-year comparisons and I will also make some quarter-over-quarter comparisons where both are relevant and meaningful. Fourth quarter net sales were $430 million, a 29% decrease as compared to $607 million last year. Consolidated comparable sales were negative 27% retail comps were negative 28% and Express Factory outlet store comps were negative 27%. Our sales continued to be materially impacted by COVID-19 in the fourth quarter as traffic remained pressured compared to last year. While our merchandise margin contracted by approximately 600 basis points versus last year, on a relative year-over-year basis, we saw sequential improvement compared to our third quarter results and we expect merchandise margin to continue to improve into the first quarter of 2021 and begin to normalize as we move throughout the balance of the year. Buying and occupancy expenses were down $21 million on an absolute dollar basis, but deleveraged by approximately 400 basis points due to the decline in sales. The overall dollar reduction in buying and occupancy was driven by fleet rationalization activity, rent savings, the organizational restructures we announced in January and November of 2020 and the incremental actions we took to manage liquidity, including significant rent abatements we negotiated with our landlords. The year-over-year dollar reduction in buying and occupancy was significantly greater in Q4 than Q2 and Q3 as we recognized a $7 million P&L benefit from our executed rent abatements. It should be noted that buying and occupancy was negatively impacted by a $4.5 million noncash impairment charge related to certain stores and store assets. During the fourth quarter, we had a gross profit of $71 million, with a gross margin rate of 16.6%, down approximately 1,000 basis points as compared to the prior year, driven by the soft decline. However, compared to the third quarter, our gross margin rate improved on an absolute basis and also on a relative year-over-year basis due to higher total sales, the above mentioned improvement in merchandise margin and our improved buying and occupancy rate. We expect gross margin rate to continue to improve in 2021 through self-improvement, markdown management and expense leverage. SG&A expenses were $134 million, a decrease of $15 million compared to last year. Similar to the buying and occupancy reduction, the reductions in SG&A expenses were driven by fleet rationalization, the previously announced cost reductions associated with our corporate restructuring and the actions we took as part of our COVID-19 savings. As a percentage of sales, SG&A came at 31.1%, deleveraging approximately 700 basis points as a result of the significant decline in sales. On a GAAP basis, our operating loss was $63 million as compared to last year's operating loss of $190 million. The loss from the prior year includes approximately $205 million in non-core operating expenses. Excluding the impact of the previously mentioned noncash impairment charges, our adjusted operating loss for the fourth quarter was $58 million as compared to last year's adjusted operating income of $17 million. Fourth quarter diluted loss per share was $0.82 on a GAAP basis, compared to a loss of $2.21 per diluted share in the fourth quarter of 2019. On an adjusted basis, diluted loss per share was $0.66 compared with last year's adjusted earnings of $0.21 per diluted share. Our effective tax rate for the fourth quarter was 16.9%. This reflects the valuation allowance recorded against our deferred tax assets. For the full year 2020, net sales totaled $1.2 billion, a decrease of 40% compared with the full year of 2019. Consolidated comparable sales was negative 27%, retail comps were negative 29% and Express factory outlets store comps were negative 21%. For the full year 2020 loss per share was $6.27 on a GAAP basis, which compares with the loss per share of $2.49 in 2019. Adjusted diluted loss per share was $4.86 compared to last year's adjusted diluted loss per share of $0.08. The full year results were also impacted by the previously mentioned restructuring charge and the non-cash write off of our intangible assets. Now let me discuss our liquidity position and review our balance sheet and cash flow. Over the past year, we have taken a number of steps to reduce costs and improve liquidity. We drew down on our existing ABL credit facility. We secured $140 million of incremental financing through a $90 million FILO term loan, that was outstanding at year-end, and an additional $50 million delayed draw term loan, for which we have satisfied the requirements and provided notice to the lenders of our intent to borrow. We negotiated $85 million of rent abatement, deferrals and rent reductions. We reduced $250 million, of course, through expense reductions, capital reductions and inventory cuts, and we expect the CARES Act benefit of approximately $120 million, of which $95 million is expected at the end of the second quarter. As a result of these actions, our cash position at the end of the fourth quarter was $56 million and our long-term borrowings were $196 million, of which $106 million is drawn on our $250 million ABL, and the remaining $90 million is from the new FILO term loan. Inventories at year end was $264 million, a 20% increase as compared to last year's $220 million. As a reminder, we ended 2019 with inventory down 18% versus 2018, after making considerable efforts to optimize our inventory levels and composition. Therefore, on a two-year basis, our inventory is down 1%. Additionally, almost 40% of our assortment consisted of wear-to-work and occasion-based categories, which were disproportionately impacted by the pandemic. However, the majority of this inventory is what we consider core items with low markdown risk. And as we move through the year, we expect our inventory to be more in line with our self-expectations. Moving on to our high-level outlook. Our assumptions are dependent upon the duration and intensity of the pandemic. We expect the following for the full year of 2021

[Tim Baxter:]

Thanks, Perry. When I think about what will more sharply distinguish 2021 from 2020, I returned to that frame quote on my desk, that the word crisis when written in Chinese consists of two characters, one for danger, and the other for opportunity. Everything that we accomplished in 2020, from operational improvements, and the streamlining of our store fleet, to the reinvention of our product, and the repositioning of our brand, from the reduction in our cost base to the bolstering of our finances, are the reasons that we were able to mitigate the dangers of the pandemic. In the face of exceptionally difficult circumstances, we continue to advance with clarity and purpose. We built a solid foundation, advanced the EXPRESSway Forward strategy, deepened our engagement with our community and made investments in our eCommerce business. I expect us to return to positive EBITDA in the back half of this year, and we are well positioned to seize every opportunity in 2021. Thank you for your interest in Express. And we'll take your questions.

[Operator:]

Your first question comes from Susan Anderson from B. Riley Securities. Your line is open.

[Susan Anderson:]

I'm curious, just if there's any thoughts on the consumer coming back to fashion yet? Or is it still really heavily trended more towards casual and loungewear? And I guess within that fashion component, any trends yet of consumers coming back to work wear? And then also, I'm curious, are you seeing any differences in performance by geography, maybe from the South to North, where things may be more open already in the South?

[Tim Baxter:]

Susan, I'll start with the latter part of your question. Yes, we are seeing differences by geography. In fact, the Southeast performed at about 20 points better than the Northeast and California. And as there have been many announcements made over the past week or so about the loosening up of restrictions in places like Texas, we have also seen changes in our trends in those locations. So it seems to be light at the end of that tunnel. And as restrictions loosen up or in places where restrictions have been looser, we are seeing much, much better trends than in places where the restrictions are more restricted, I guess, would be the way to say that. The first part of your question about fashion. The answer is, yes, people are buying fashion. I think that the only caveat I would put on that is that the consumers' expectation, I believe, has changed forever in terms of comfort. So while we are seeing a return to fashion and a return - somewhat of a return to what we would have considered wear-to-work categories. The most critical thing is that those categories have become more and more comfortable. So we launched men's knit suits last year, and we have continued to see incredible results, in spite of the fact that that category is obviously very challenged. The fastest turning component of that category is actually fashion and comfort in our soft stretch suits. In women's, for example, we've introduced an entirely new range of modular suiting, much of which is knit, including tailored looking bottoms that are actually just as stretchy and just as comfortable as your favorite sweatpants. So we are beginning to see people returning to those categories, beginning to see a little bit of energy around those categories. And I expect that we'll continue to see that as people return to work in offices, and perhaps more importantly, return to occasions.

[Susan Anderson:]

Great, that's really helpful. That sounds positive. And then maybe if I could just add a follow-up on the store closures, I think you're looking to close 20 retail stores, five outlets. And then you have the smaller Express Edit store, which you're testing. I guess, any thoughts on moving some of those other stores down to the smaller format? And I guess how quickly could you do that if this Express Edit store comes back with positive results? And then maybe also, if you could talk about the cost to relocate or redo a store?

[Tim Baxter:]

Sure. I think fleet optimization, as I said, is our focus. And we have the opportunity to do quite a few things. And we have tremendous lease flexibility. So as we continue to learn what consumers are going to expect from our physical locations in a post-pandemic world, we'll be able to apply those learnings to the vast majority of our fleets over the next few years. I talked a little bit about the King of Prussia store. And that was a test. We took a mall-based store, we reduced its square footage by 45%. And as I said, our productivity in that location is double the balance of our fleet. So we know that we have the opportunity to shrink much of our mall-based square footage, and be significantly more productive. The Express Edit concept stores are even smaller in terms of square footage. So the two that we have now, one is 1,400 square feet, and one is 4,000 square feet. And as we open the remainder of them, we expect to stay within that range. So these are - for example, the 4,000 square foot store in Nashville is half the size of the King of Prussia store that we reduced by 45%. So we definitely have an opportunity to be much more productive in our physical spaces. We have the flexibility in our leases to affect our mall-based fleet appropriately over the next few years. And as we continue to learn what the street side smaller Express Edit locations could do, we actually have the opportunity to potentially expand that fleet.

[Susan Anderson:]

Great. That sounds positive. And then if I could add in there, the new UpWest stores, I'm just curious what the response has been from the consumer? And how are you marketing that new concept to the consumer to let her know that it's out there?

[Tim Baxter:]

Yes, UpWest has, as I said, operated as its own entity. And so it truly is operating out of a separate space here in Columbus as a digital startup. As a part of their strategy, like many digital brands, they recognize that one of the greatest ways to drive brand awareness and acquire new customers was in physical locations. So they have executed several pop-ups in 2020 and, as we said, expect to execute quite a few more in 2021. The purpose of those stores really is customer acquisition and brand awareness, so they are short term leases. But we'll also continue to see what the customer's appetite is for that product in a physical space. So that may become a permanent part of the strategy, likely will become a permanent part of the strategy. But UpWest is a digitally native brand, and we intend to keep it, minimally, even our longer-term plans have it at 75% digital demand. So very, very excited about the results and very excited about the future there.

[Susan Anderson:]

Great. I'll let someone else hop on. Good luck this year.

[Operator:]

Your next question comes from Marni Shapiro from Retail Tracker. Your line is open.

[Marni Shapiro:]

So Perry, if you could just first clarify your comment. I think you said SG&A for the year, you're looking at it to be down high single digits versus 2019. Was that - did you say that was a dollar basis or as a percent of sales? I think I missed that part.

[Perry Pericleous:]

On a dollar basis. When you look at it compared to 2019, we expect it to be down on the high single digits.

[Marni Shapiro:]

Okay, fantastic. And then just could you talk a little bit about the Marketplace opportunity and what you're seeing there? You've had a growing breadth of brands there that looks really fantastic and brands that I'm used to seeing in specialty stores that seem to be disappearing quickly. So could you just talk a little bit about that? And is there any thought as to bringing any of these brands into some of your bigger and best stores?

[Tim Baxter:]

Yes, Marni. The answer is yes on the second part of that. So let me talk about Marketplace, though. We do see, as I said, Marketplace as being a key part of our $1 billion eCommerce demand plan that we'll share in much greater detail with you all in the second quarter. But we've had great success in Marketplace. The customer has responded extraordinarily well to - particularly to product outside of our apparel and accessories categories, but also two products within those categories where we are augmenting our existing assortments. So across the board, it's really been very exciting to see how the customer has responded to our Edit within the Marketplace. I also believe that there is an opportunity for us to bring some of those brands, some of the most successful brands into our larger physical stores. As I said, we have the opportunity to make the stores more productive by shrinking the square footage; but in the meantime, we can also make those stores much more productive by bringing new concepts and new product categories in. So yes, more to come on the Marketplace strategy, a very exciting part of the eCommerce strategy, but also potentially a powerful part of our physical strategy.

[Marni Shapiro:]

That's great. And can I ask one more follow-up. I'm curious - I know your inventory is up, and you hold a lot of that in the core and basic stuff, but - and so this question might sound strange. But do you think you have enough inventory? Or do you feel you have enough inventory to drive the sales on the fashion side? Watching your customers come into the stores and they are blind to basics right now, and they're going right for every top of the shoulder details. So I'm curious what your balance looks like and how you feel about that for spring?

[Tim Baxter:]

I feel good about that going forward. I don't feel good about it right now. Perry mentioned that we have experienced some delays in shipments. And so our first spring deliveries have been delayed. And so we have not executed our March product launch yet. We are executing that next week, which is two weeks later than a year ago and three weeks later than 2019. So the percentage of our inventory right now that's in new fresh spring fashion product is lower than I'd like it to be, but that will correct itself over the next couple of weeks. And we agree with you, the response to our fashion product has been outstanding. And the agreed - the core pieces of the business have been more challenged. But actually, our Body Contour, which we just launched in February, which is a part of Express Essentials, which is core, but it's fashion core, has been - it's been explosive. I mean, it's been really, really good. So I'm excited about our ability to continue to drive fashion and also develop these new core businesses that appeal to the fashion consumer.

[Marni Shapiro:]

That's fantastic. Well, the fashion is looking good. I'm excited to see the new set. Good luck, you guys.

[Operator:]

Your next question comes from Roxanne Meyer from MKM Partners. Your line is open.

[Roxanne Meyer:]

A couple of questions for you. First, knowing - on the inventory, knowing that you've got a focus on increasing denim fits and styles and also in your new knit assortment where you've got four different fits, it sounds like you're going to need to significantly increase SKU count and breadth. So how are you thinking about that in the context of market risk overall for these categories? Or are these categories in a way part of what you would consider having a longer shelf life and therefore, aren't exposed to risk?

[Tim Baxter:]

They definitely have a longer shelf life, so much less exposure to risk. And as I said, it's important, it's actually critical for us to develop these new core categories. We have, as you all know, been historically very, very well-known for occasion and wear-to-work. And I think the past year, we talked about dimensionalizing our assortment outside of those categories, pre-pandemic - and obviously, the pandemic has accelerated the need - and also demonstrated just how important it is to have a broader assortment that services all of a customer's needs. So I feel really good actually about the way we are building the assortment. And we have been overskewed in many categories in the past. So in total, you'll actually see a lower SKU count than previously. It's just going to be much more focused and therefore, should be a much more powerful assortment.

[Roxanne Meyer:]

Okay, great. And then moving on to your comments about moving more quickly from - to have an assortment move from retail to outlet. I was wondering if you could expand on that a bit? And just overall, I guess, remind us how much of the outlet product is made for outlet versus coming from retail? And are you just talking about kind of adopting the styles from retail to outlet or actually transferring some of that product? And just how you think about the strategy in the context of the potential for increased cannibalization?

[Tim Baxter:]

Sure. So our outlet strategy previously was 100% made for outlet product. Over the past year, we have transferred some product that was intended for retail into our outlet channel and seeing great success in our outlet channel with that product. As we move into 2021, we adopted a very different philosophy. And that - so the product was still - it's still - the vast majority of the products will still be made for outlet. But the product will reflect the same aesthetic as the mainline. So that's a huge change from where we've been, and we're already seeing great success with that as well. We will - to the other part of your question, we previously might have taken a best seller from spring of 2020 and put it into our outlet assortment in spring of 2021, so literally a full year later. What you'll begin to see is trends and ideas and, in some cases, styles, appear in our full price retail channels, in stores and online, and then 60 to 90 days later actually appear with a strong value proposition in our outlet channel. So the takedown from retail to outlet will go from what was historically a year to, in some cases, 60 to 90 days.

[Roxanne Meyer:]

Okay. Great. That's helpful. And certainly, I can appreciate how it can make that channel that much more current and relevant. And then as it relates to - I know it sounds like there's more details coming on your eCommerce strategy, but just wondering, when you think about that $1 billion target for eCommerce, do you see that as incremental to your total business? Or does some of that assume a transition of demand in part from stores to online? And how - I guess, how are you factoring in what's going on at stores? I know you talked about your store base and, obviously, a move to smaller stores. And I imagine it's all part of a larger strategy.

[Tim Baxter:]

Yes, absolutely. I think - I would love to tell you that I think it's going to be all incremental. But I would stop short of saying that at this point, because we simply don't know what consumers' post-pandemic behavior is going to be in physical locations. So it's mission-critical because it may just be that that is how the consumer is going to choose to shop more and more in a post-pandemic world. But we are going to continue, as I said, to learn about what the consumers' expectations are in physical stores. And our hope is that we'll obviously be able to return to growth in that channel as well. So - I know that's not an answer to your question, but the answer is, could be incremental or it could be a shift in consumer behavior. All I know is that we can drive $1 billion in eCommerce and we must drive $1 billion in eCommerce, and that's what we're going to do.

[Roxanne Meyer:]

Excellent. Looking forward to hearing more details and best of luck.

[Operator:]

Your next question comes from Jen Redding from Wedbush Securities. Your line is open.

[Jennifer Redding:]

Yes. Great job guys getting to the light at the end of the tunnel. And just a few questions for you. One, are you guys seeing any kind of transfer to stores from digital as location restrictions loosen? And also, just if you can give any color on kind of high-level trends, like just big changes you're seeing? We've heard a lot about the shifts between tops and bottoms and newness in bottoms. And then any category trends that you can see there new? And then just third, our data shows some very, very strong first quarter to date gross margin trends. And I'm just kind of wondering, if you guys see or think the stimulus for 1,400 would kind of come as a nice, pleasant surprise opportunity? And if there are any other kind of surprise upside opportunities that you guys see as you can potentially take advantage and capitalize on it as we are at the light at the end of the tunnel?

[Tim Baxter:]

Hi, Jen. So there's a lot to unpack there, but I'm going to try to hit all of it. We are not seeing a shift away from eCommerce in geographies where we are seeing an increase in store traffic. Our eCommerce demand continues to be strong. We're still seeing increases in traffic and conversion. And so we're not seeing that. I think that was the first part of the question. The second part of the question, in terms of product categories that are working; as I said, we are well positioned to take advantage of every opportunity and recapture our market leadership position in occasion-based categories and wear-to-work based categories as people return to offices and return to celebrations and occasions of all time. We are also developing new core categories like denim and like Express Essential knits, so that we have a great balance and that so when he or she comes to our store or our website, they're going to be able to build a powerful wardrobe that fulfills all of their needs. And so I'm very confident that the success we're seeing and the new core that we're building will continue and that we will recapture and regain our market leadership position in those wear-to-work and occasion-based categories.

[Jennifer Redding:]

Great. And then any kind of insight in just kind of potential upside opportunities just near-term or thoughts on the stimulus or anything else on the first quarter trends?

[Tim Baxter:]

Well, I do - I think we all believe that the stimulus will encourage people who - many of whom haven't shopped to a great extent in the past year, and many of whom are going to be emerging from an extended quarantine. We do expect that the stimulus check could be a positive tailwind for us, and that, that could help drive business as we move into the second quarter. Obviously, vaccinations, and as vaccinations continue to roll out across the country, we believe that is a tailwind. We're also reissuing our private label credit card, which we believe will be a huge opportunity for us. And we're, as I said, enhancing our loyalty program and expanding to four tiers and making it much easier for customers to earn rewards. So all of those, I think, are very immediate opportunities for us as we move through the balance of the first quarter and into the second quarter.

[Jennifer Redding:]

Great. And just one more, if you have a second. On the - I know you guys did a payments program online. How did that work? I can't remember if it was Klarna or Afterpay, sorry. But can you comment on that and how your - how you feel about that kind of opportunity and what you're seeing so far?

[Perry Pericleous:]

Yes. So, from a Klarna standpoint, we've seen an increase in the AOV for the customers that are using Klarna, so we're very pleased. We're still in the initial stages of this program. But what we've seen so far is very encouraging from an AOV and the adoption of the Klarna.

[Jennifer Redding:]

Okay. Great. And this fourth quarter was the first quarter that you guys had that live on the platform?

[Perry Pericleous:]

Yes. Yes, it was.

[Jennifer Redding:]

Okay, great. Awesome. Okay, thanks so much and great. Like you said you guys had a little bit tougher on those, just given the nature of your products, just great to have navigating to where we are.

[Operator:]

I would now like to turn the call over back to the management for closing remarks.

[Tim Baxter:]

Great. Thank you for joining us, everyone, and we look forward to updating you on the progress of our strategy.

[Perry Pericleous:]

Thank you.

[Operator:]

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.