Add
EXPR to Portfolio
Set Alert
Email to a
Friend
| |||
|
|
Quotes & Info
|
| EXPR > SEC Filings for EXPR > Form 10-Q on 5-Dec-2012 | All Recent SEC Filings |
5-Dec-2012
Quarterly Report
Overview
Express is a specialty apparel and accessories retailer offering both women's
and men's merchandise. We have over 30 years of experience offering a distinct
combination of style and quality at an attractive value to women and men between
20 and 30 years old. We offer our customers an assortment of fashionable apparel
and accessories to address fashion needs across multiple aspects of their
lifestyles, including work, casual, jeanswear, and going-out occasions.
The third quarter of 2012 was a very challenging one for our Company where we realized a decrease in traffic, which led to negative comparable store sales and a decline in gross margin. In response to our diminished performance, we re-assorted our sweater offering, introduced entry price point fashion items in key categories, and communicated clearer pricing and promotions. While we remain cautious regarding our overall performance in the fourth quarter of 2012, we believe these actions, along with continued focus on our four growth pillars, will position us well for the future. Our growth strategies, and a summary of our execution of these strategies, is presented below.
Improve Sales and Margin of Our Existing Retail Stores The results of this growth pillar did not meet our expectations during the third quarter. Net sales per average gross square foot was $348 for the trailing 12 months ended October 27, 2012, down from $355 for the trailing 12 months ended October 29, 2011, primarily driven by decreased traffic in our stores. Net sales per average gross square foot is determined by dividing net sales (excluding e-commerce sales, shipping and handling revenue related to e-commerce, gift card breakage, and royalties) for the period by average gross square feet during the period. Additionally, we continued to see increased promotional activity in order to sell through inventory, primarily in women's, which contributed to the lower margin. Despite a decrease in traffic, men's remained solid and performed well, achieving balanced growth across categories.
Expand Our Store Base
In the third quarter of 2012, we opened 7 new stores in the United States and 1
in Canada and closed 1 store in the United States, ending the quarter with 618
locations. For the remainder of 2012, we expect to open 8 additional stores, 5
in the United States and 3 in Canada, and to close 1 store in the United States.
Additionally, we have plans for 2 flagship locations, 1 in San Francisco and 1
in New York, and currently expect both flagships to open prior to the 2013
holiday season. We expect these openings to result in approximately $8.0 million
of incremental pre-opening rent expense in 2012.
Expand Our e-Commerce Platform
In the third quarter of 2012, our e-commerce sales increased 21% over the third
quarter of 2011. The growth in e-commerce sales was driven by increased sales of
both men's and women's merchandise. E-commerce sales represented 12% of total
net sales in the third quarter of 2012, and we continue to expect this channel
to grow to 13-15% of total net sales.
Expand Internationally
We continue to focus on our international expansion plans with additional
openings in the Middle East under our Development Agreement with Alshaya during
the third quarter. At quarter end, we were earning royalties from 10 stores, a
net increase of 3 stores from the second quarter of 2012. In addition, as
previously announced, we have entered into 2 new franchise agreements, 1 in
Mexico and 1 multi-country agreement covering certain other Latin American
countries. We anticipate that we will have 3 stores operating under these new
agreements by year end.
Our results to date are not necessarily indicative of the results to be expected for the full year. Such results could be impacted by a number of factors outside our control, including overall economic conditions in the United States, costs to procure and produce our product, and competitors' actions. See "Forward-Looking Statements" for additional factors.
How We Assess the Performance of Our Business
In assessing the performance of our business, we consider a variety of
performance and financial measures. These key measures include net sales,
comparable sales and other individual store performance factors, gross profit
and selling, general, and administrative expenses.
Net Sales. Net sales reflects revenues from the sale of our merchandise, less
returns and discounts, as well as shipping and handling revenue related to
e-commerce, gift card breakage, and royalties earned from the Development
Agreement with Alshaya.
Comparable Sales and Other Individual Store Performance Factors. Comparable
sales are calculated based upon stores that were open at least thirteen full
months as of the end of the reporting period and also includes e-commerce sales.
A store is not considered a part of the comparable sales base if the square
footage of the store changed by more than 20% due to remodel or relocation
activities. We also review sales per gross square foot, average unit retail
price, units per transaction, dollars per transaction, traffic, and conversion,
among other things, to evaluate the performance of individual stores. We also
review sales per gross square foot on a company-wide basis.
Gross Profit. Gross profit is equal to net sales minus cost of goods sold,
buying and occupancy costs. Gross margin measures gross profit as a percentage
of net sales. Cost of goods sold, buying and occupancy costs includes the direct
cost of purchased merchandise, inventory shrinkage, inventory adjustments,
inbound freight to our distribution center, outbound freight to get merchandise
from our distribution center to stores, merchandising, design, planning and
allocation and manufacturing/production costs, occupancy costs related to store
operations (such as rent and common area maintenance, utilities, and
depreciation on assets), and all logistics costs associated with our e-commerce
business.
Our cost of goods sold increases in higher volume quarters because the direct
cost of purchased merchandise is tied to sales. Buying and occupancy costs are
largely fixed and do not necessarily increase as volume increases. Changes in
the mix of our products, such as changes in the proportion of accessories, which
are generally higher margin, may also impact our overall cost of goods sold. We
review our inventory levels on an on-going basis in order to identify
slow-moving merchandise and generally use markdowns to clear such merchandise.
The timing and level of markdowns are driven primarily by seasonality and
customer acceptance of our merchandise. We use third-party vendors and
company-owned outlet stores to dispose of marked-out-of-stock merchandise. We
use third parties to source all of our inventory, with the primary drivers of
the inventory costs being raw materials, labor in the countries where our
merchandise is sourced, and logistics costs associated with transporting our
merchandise.
Selling, General, and Administrative Expenses. Selling, general, and
administrative expenses include all operating costs not included in cost of
goods sold, buying and occupancy costs, with the exception of costs such as
proceeds received from insurance claims and gain/loss on disposal of assets,
which are included in other operating (income) expense, net. These costs include
payroll and other expenses related to operations at our corporate home office,
store expenses other than occupancy, and marketing expenses, which primarily
include production, mailing, and print advertising costs. With the exception of
store payroll and marketing, these expenses generally do not vary proportionally
with net sales. As a result, selling, general, and administrative expenses as a
percentage of net sales is usually higher in lower volume quarters and lower in
higher volume quarters.
Results of Operations
The Third Quarter of 2012 Compared to the Third Quarter of 2011
The table below sets forth the various line items in the unaudited Consolidated
Statements of Income and Comprehensive Income as a percentage of net sales for
the third quarter of 2012 and the third quarter of 2011. Due to seasonal
variations in the retail industry, the results of operations for any current
period are not necessarily indicative of results expected for the full year or
of future financial results. The seasonality of our operations may also lead to
significant fluctuations in certain asset and liability accounts.
Percentage of Net Sales
Thirteen Weeks Ended
October 27, 2012 October 29, 2011
Net sales 100 % 100 %
Cost of goods sold, buying and occupancy costs 68 % 64 %
Gross profit 32 % 36 %
Selling, general, and administrative expenses 25 % 24 %
Other operating (income) expense, net - % - %
Operating income 7 % 13 %
Interest expense 1 % 1 %
Interest income - % - %
Other income, net - % - %
Income before income taxes 6 % 11 %
Income tax expense 3 % 5 %
Net income 4 % 7 %
Net Sales
Thirteen Weeks Ended
October 27, 2012 October 29, 2011
Net sales (in thousands) $ 468,527 $ 486,784
Comparable sales percentage (decrease) increase (5 )% 5 %
Gross square footage at end of period (in thousands) 5,351 5,257
Number of:
Stores open at beginning of period 611 599
New stores 8 8
Closed stores (1 ) -
Stores open at end of period 618 607
|
Net sales decreased by approximately $18.3 million, or 4%, from $486.8 million
in the third quarter of 2011 to $468.5 million in the third quarter of 2012.
Comparable sales decreased by $24.6 million, or 5%, in the third quarter of 2012
compared to the third quarter of 2011. The comparable sales decrease was driven
by decreases in both transactions and average dollar sales, partially offset by
growth in e-commerce sales. We attribute the decrease in transactions to lower
traffic in our stores and a lesser acceptance of product in certain women's
categories. Non-comparable sales increased $5.3 million, primarily driven by new
store openings.
Gross Profit
The following table shows cost of sales and gross profit in dollars for the
stated periods:
Thirteen Weeks Ended
October 27, 2012 October 29, 2011
(in thousands)
Cost of goods sold, buying and occupancy costs $ 316,989 $ 310,816
Gross profit $ 151,538 $ 175,968
|
The 390 basis point decrease in gross margin, or gross profit as a percentage of net sales, in the third quarter of 2012 compared to the third quarter of 2011 was comprised of a 240 basis point increase in buying and occupancy costs and a 150 basis point deterioration in merchandise margin. The increase in buying and occupancy costs is primarily driven by increased rent, including the impact of pre-opening rent for the 2 flagship stores. The decrease in merchandise margin was primarily driven by increased promotional activity during the quarter.
Selling, General, and Administrative Expenses
The following table shows selling, general, and administrative expenses in
dollars for the stated periods:
Thirteen Weeks Ended
October 27, 2012 October 29, 2011
(in thousands)
Selling, general, and administrative expenses $ 117,722 $ 115,061
|
The $2.7 million increase in selling, general, and administrative expenses in
the third quarter of 2012 compared to the third quarter of 2011 was driven by a
$3.7 million increase in marketing expense, primarily related to a shift in
timing for direct mail campaigns and a $1.3 million increase in information
technology expenses to support international expansion and e-commerce growth,
partially offset by a decrease in incentive compensation expense.
Interest Expense
The following table shows interest expense in dollars for the stated periods:
The $1.5 million decrease in interest expense in the third quarter of 2012
compared to the third quarter of 2011 resulted primarily from a lower debt
balance primarily due to the $119.7 million prepayment of the Term Loan in the
fourth quarter of 2011.
Income Tax Expense
The following table shows income tax expense in dollars for the stated periods:
The effective tax rate was 41.4% for the third quarter of 2012 compared to 40.3%
for the third quarter of 2011.
Results of Operations
The Thirty-Nine Weeks Ended October 27, 2012 Compared to the Thirty-Nine Weeks
Ended October 29, 2011
The table below sets forth the various line items in the unaudited Consolidated
Statements of Income and Comprehensive Income as a percentage of net sales for
the thirty-nine weeks ended October 27, 2012 and the thirty-nine weeks ended
October 29, 2011. Due to seasonal variations in the retail industry, the results
of operations for any current period are not necessarily indicative of results
expected for the full year or of future financial results. The seasonality of
our operations may also lead to significant fluctuations in certain asset and
liability accounts.
Percentage of Net Sales
Thirty-Nine Weeks Ended
October 27, 2012 October 29, 2011
Net sales 100 % 100 %
Cost of goods sold, buying and occupancy costs 66 % 64 %
Gross profit 34 % 36 %
Selling, general, and administrative expenses 24 % 24 %
Other operating income, net - % - %
Operating income 10 % 12 %
Interest expense 1 % 2 %
Interest income - % - %
Other income, net - % - %
Income before income taxes 9 % 10 %
Income tax expense 4 % 4 %
Net income 5 % 6 %
Net Sales
Thirty-Nine Weeks Ended
October 27, 2012 October 29, 2011
Net sales (in thousands) $ 1,419,358 $ 1,400,202
Comparable sales percentage increase - % 6 %
Gross square footage at end of period (in thousands) 5,351 5,257
Number of:
Stores open at beginning of period 609 591
New stores 20 21
Closed stores (11 ) (5 )
Stores open at end of period 618 607
|
Net sales increased by $19.2 million, or 1%, from $1.4 billion in the
thirty-nine weeks ended October 29, 2011 to $1.4 billion in the thirty-nine
weeks ended October 27, 2012. Comparable sales were flat for the thirty-nine
weeks ended October 27, 2012 compared to the thirty-nine weeks ended October 29,
2011. The flat comparable sales results were driven by decreases in both
transactions and average dollar sales, partially offset by growth in e-commerce
sales. We attribute the decrease in transactions to lower traffic in our stores
and a lesser acceptance of product in certain women's categories. Non-comparable
sales increased $22.1 million, primarily driven by new store openings.
Gross Profit
The following table shows cost of sales and gross profit in dollars for the
stated periods:
Thirty-Nine Weeks Ended
October 27, 2012 October 29, 2011
(in thousands)
Cost of goods sold, buying and occupancy costs $ 932,532 $ 896,088
Gross profit $ 486,826 $ 504,114
|
The 170 basis point decrease in gross margin, or gross profit as a percentage of net sales, in the thirty-nine weeks ended October 27, 2012 compared to the thirty-nine weeks ended October 29, 2011 was comprised of a 110 basis point deterioration in merchandise margin and a 60 basis point increase in buying and occupancy costs. The decrease in merchandise margin was primarily driven by higher product costs and increased promotional activity in the latter part of the second quarter and into the
third quarter. The increase in buying and occupancy costs is primarily driven by
increased rent, including the impact of pre-opening rent for the 2 flagship
stores.
Selling, General, and Administrative Expenses
The following table shows selling, general, and administrative expenses in
dollars for the stated periods:
Thirty-Nine Weeks Ended
October 27, 2012 October 29, 2011
(in thousands)
Selling, general, and administrative expenses $ 347,224 $ 342,236
|
The $5.0 million increase in selling, general, and administrative expenses in
the thirty-nine weeks ended October 27, 2012 compared to the thirty-nine weeks
ended October 29, 2011 was driven by a $3.6 million increase in information
technology expenses to support international expansion and e-commerce growth and
a $2.6 million increase in marketing expense, primarily related to a shift in
timing for direct mail campaigns, partially offset by a decrease in incentive
compensation expense.
Interest Expense
The following table shows interest expense in dollars for the stated periods:
The $13.5 million decrease in interest expense for the thirty-nine weeks ended October 27, 2012 compared to the thirty-nine weeks ended October 29, 2011 resulted primarily from a $7.2 million loss on extinguishment related to the repurchases of $49.2 million of Senior Notes in the first and second quarters of 2011 and the amendment of the $200 million Revolving Credit Facility in the second quarter of 2011. The remaining reduction in expense relates to a lower debt balance in 2012 compared to 2011 due to the $119.7 million prepayment of the Term Loan in the fourth quarter of 2011. Income Tax Expense
The following table shows income tax expense in dollars for the stated periods:
The effective tax rate was 40.2% for both the thirty-nine weeks ended October
27, 2012 and the thirty-nine weeks ended October 29, 2011.
On a full year basis, we anticipate our effective tax rate will be between 39.9%
and 40.2%. The rate is sensitive to the domestic/international profit mix since
we recorded a valuation allowance against deferred tax assets arising from the
net operating loss of foreign subsidiaries.
Adjusted Net Income
The following table presents Adjusted Net Income and Adjusted Earnings Per
Diluted Share for the stated periods:
27
--------------------------------------------------------------------------------
Table of Contents
Thirty-Nine Weeks Ended
October 27, 2012 October 29, 2011
(in thousands)
Adjusted Net Income $ 75,324 * $ 84,997
Adjusted Earnings Per Diluted Share $ 0.86 * $ 0.96
|
* No adjustments were made to net income or earnings per diluted shares for the thirty-nine weeks ended October 27, 2012.
We supplement the reporting of our financial information determined under GAAP with certain non-GAAP financial measures: adjusted net income and adjusted earnings per diluted share. We believe that these non-GAAP measures provide meaningful information to assist the readers of our financial information in understanding our financial results and assessing our prospects for future performance. Management believes adjusted net income and adjusted earnings per diluted share are important indicators of our operations because they exclude items that may not be indicative of, or are unrelated to, our core operating results, and provide a better baseline for analyzing trends in our underlying business. Because non-GAAP financial measures are not standardized, it may not be possible to compare these financial measures with other companies' non-GAAP financial measures having the same or similar names. These adjusted financial measures should not be considered in isolation or as a substitute for reported net income and reported earnings per diluted share. These non-GAAP financial measures reflect an additional way of viewing our operations that, when viewed with our GAAP results and the below reconciliations to the most directly comparable GAAP financial measures, provide a more complete understanding of our business. We strongly encourage investors and stockholders to review our financial statements and publicly-filed reports in their entirety and not rely on any single financial measure.
The table below reconciles the non-GAAP financial measures, adjusted net income and adjusted earnings per diluted share, with the most directly comparable GAAP financial measures, net income and earnings per diluted share. No adjustments were made to net income or earnings per diluted share for the thirty-nine weeks ended October 27, 2012, and therefore no tabular reconciliation has been included for the respective period.
Thirty-Nine Weeks Ended October 29, 2011
Weighted
Average Diluted
(in thousands, except Earnings per Diluted Shares
per share amounts) Net Income Share Outstanding
Reported GAAP Measure $ 80,303 $ 0.90 88,838
Transaction Costs (a)* 348 0.01
Interest Expense (b)* 4,346 0.04
Adjusted Non-GAAP
Measure $ 84,997 $ 0.96
|
(a) Includes transaction costs related to the secondary offering completed in April 2011.
(b) Includes premium paid and accelerated amortization of debt issuance costs and debt discount related to the repurchases of $49.2 million of Senior Notes and the amendment of the $200 million Revolving Credit Facility.
* Items were tax affected at our statutory rate of approximately 39% for the thirty-nine weeks ended October 29, 2011.
Liquidity and Capital Resources
General
Our business relies on cash flows from operations as our primary source of liquidity. We do, however, have access to additional liquidity, if needed, through borrowings under our Revolving Credit Facility. Our primary cash needs are for merchandise inventories, payroll, store rent, and capital expenditures (primarily associated with opening new stores, updating existing stores, and information technology projects). The most significant components of our working capital are merchandise inventories, accounts payable, and other accrued expenses. Our liquidity position benefits from the fact that we generally collect cash from sales to customers the same day or, in the case of credit or . . .
|
|