Express, Inc. (EXPR) on Q1 2021 Results - Earnings Call Transcript
Operator: Welcome to the Express Inc. Q1 2021 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. To ask a question during this session, you will need to press star, one on your telephone. Please be advised that today’s conference is being recorded. If you require any further assistance, please press star, zero. I would now like to hand the conference over to your speaker today, Dan Aldridge, Vice President of Investor Relations. Please go ahead.
Dan Aldridge: Thank you Mariella. 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 the 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. Our comments today will supplement the detailed information provided in both the press release and the investor presentation available on the company’s Investor Relations website. In addition, you can locate a reconciliation of any adjusted results discussed in our comments to amounts reported under GAAP on our website or in our earning release. All commentary on year-over-year comparisons in our prepared remarks today refer to 2020 unless otherwise noted. With me today are Tim Baxter, Chief Executive Officer; Perry Pericleous, Chief Financial Officer; and Matt Moellering, President and Chief Operating Officer. I’ll now turn the call over to Tim.
Tim Baxter: Thank you Dan and good morning everyone. Our top and bottom line performance in the first quarter exceeded our expectations. Although February was tough, March and April were considerably better, and we experienced a significant inflection point in the business at Easter. Our comp trends have further accelerated and our second quarter comp volumes to date are now exceeding 2019 levels. Our results are now beginning to reflect the power of our product, brand, and customer strategies. We have meaningfully advanced the Express way forward and made excellent progress on our transformation from a store in the mall to a modern, relevant, multi-channel brand with a compelling purpose, and we are well positioned for the post-pandemic world. In the first quarter, we introduced a plan to drive a billion dollars in ecommerce demand by 2024 and our first quarter ecommerce results are a strong start towards achieving that goal. We drove a 40% increase in transactions, a 19% increase in conversion, and an 18% increase in traffic, all of which contributed to an ecommerce comp above over 40% in the first quarter. We continued to see strong momentum with our fashion deliver with sell-throughs up double digits compared to 2019. We established new core denim and Express Essentials and both categories posted positive comps versus 2019, with denim up doubled digits in our retail channel. We pulled back on promotions in the first quarter based on positive customer response to our new products and we’ll continue to be less promotional going forward.
Perry Pericleous: Thank you Tim. I will start with our first quarter results, discuss our liquidity position, and provide a high level outlook on the balance of the year. My comments and comparisons will be to 2020 unless otherwise noted, and I will also make some quarter-over-quarter comparisons where those are relevant and meaningful. First quarter net sales were $346 million, an increase of 64% as compared to 2020. Consolidated comparable sales were positive 5%, retail comps were positive 11%, and Express factory outlet comps were negative 19%. Ecommerce demand compared to last year was up over 40% driven by the initiatives Tim discussed earlier. It is important to note that comparable sales calculations are not consistent across all retailers. Our comparable sales exclude sales from stores that were closed for at least one full day, including during the pandemic, consistent with our historical policy. Our sales showed significant recovery in the first quarter, particularly in the back half of the quarter. It is worth noting that these results were achieved with less promotional activity, reflecting the strength of our product and brand strategies. We improved our merchandise margin by approximately 1,100 basis points compared to 2020 and expect to improve further as our inventory composition reflects a higher penetration of new receipts. In fact, new receipts delivered higher merchandise margin in the first quarter compared to 2019, reflecting a pull back on deep, store-wide and site-wide promotions. Buying and occupancy expenses were down $30 million compared to 2020, leveraging sales by approximately 3,400 basis points. This improvement was driven by significant reductions in our expense structure, mainly by rent savings achieved through landlord negotiations, fleet rationalization, and the November 2020 workforce reduction. Additionally, there was a $15 million impairment in the first quarter of last year. Compared to 2019, buying and occupancy was down $29 million. During the first quarter, we had a gross profit of $79 million with a gross margin rate of 22.8%, increasing approximately 4,500 basis points as compared to the first quarter of 2020. This also reflects a sequential improvement to the fourth quarter of 2020 and we expect the gross margin rate to significantly improve throughout 2021 as sales continue to accelerate and our strategy continues to advance. SG&A expenses were $119 million, an increase of $20 million compared to 2020 due mainly to last year’s store closures and all of the mitigation actions we took during the pandemic. We leveraged SG&A expenses by approximately 1,300 basis points driven by our sales increases and the previously announced cost reductions associated with our corporate restructuring and fleet rationalization activities. Compared to 2019, SG&A expenses were down $16 million. Our operating loss was $41 million as compared to an operating loss of $145 million in 2020. First quarter diluted loss per share was $0.70 on a GAAP basis compared to a loss of $2.41 per diluted share in the first quarter of 2020. Adjusting for a $10 million valuation allowance booked against our deferred tax assets, our adjusted diluted loss per share was $0.55. Our effective tax rate for the first quarter was essentially zero and reflects the impact of the valuation allowance recorded against our deferred tax assets. Excluding this allowance, our effective tax rate for the first quarter was 22%. Turning to our balance sheet and cash flow, we ended the quarter with $84 million of cash and cash equivalents, and our operating cash flow improved by $130 million. As we move forward, we expect to return to positive operating cash flow in the second quarter. Inventories at the end of the first quarter were $264 million, a 2% decrease as compared to last year’s $269 million. We have made significant progress reducing red line inventory, which allows us to flow more new receipts in the back half of the second quarter and into the third quarter. We also expect to realize significant liquidity benefits from the CARES Act in 2021. During the first quarter, we received $15 million and our balance sheet at the end of Q1 reflects $97 million of CARES Act receivable, of which $45 million was received subsequent to quarter end and we now expect to receive the remaining $52 million in the back half of the year. Our borrowings were $233 million, of which $105 million was drawn against our existing ABL credit facility, and the remaining $128 million was drawn on our term loans. During the quarter, we paid down $12 million on our term loan and quarter to date we have paid an additional $61 million against our debt. Before moving to our outlook, I will review the equity offering press release we issued this morning. We filed a prospectus supplement with the SEC which gives us the ability over the next three years to sell up to 15 million shares of our common stock from time to time through an at-the-market, or ATM equity offering program. There is no timing associated with this announcement and no minimum offering amount. Moving to our high level outlook, we expect the following for 2021: sequential comp sales improvement throughout the year, significant gross margin improvement for the year, buying and occupancy expense dollars to decrease double digits as a percent to 2019, SG&A expense dollars to decrease mid-single digits as a percent to 2019, net interest expense of $4 million in the second quarter and $16 million for the full year, effective tax rate of approximately 16% for the second quarter and approximately 20% for the third quarter, fourth quarter and for the year, excluding the impact of any valuation allowances recorded against deferred tax assets, positive EBITDA for the third quarter and the second half of the year, positive operating cash flow for the year beginning with Q2, and capital expenditures of approximately $35 million. To summarize, based on the momentum we have seen in our business across all channels since Easter, further acceleration in the second quarter, continued strong response to new fashion receipts, our expectation that both sales and margin will continue to improve as we move forward, and the significant improvement in our operating cash flow, we are well positioned for 2021 and to achieve our long term goal of a mid-single digit operating margin. I look forward to updating you on our progress, and I will now turn the call back to Tim.
Tim Baxter: Thanks Perry. Before moving onto my closing thoughts, I want to briefly provide an update on another way in which we are driving long term investor value. Our digitally native brand, UpWest, had another exceptional quarter as the brand, product and purpose continued to resonate extremely well. UpWest.com experienced strong increases in traffic, conversion, and average order value in the first quarter, and the growth has been impressive with net sales increasing approximately 130% and gross margins expanding double digits in the first quarter. We are continuing to explore retail through pop-up concepts with three locations already opened and three to four more planned for the second quarter. I am proud of the progress the team has made in a short amount of time, and although UpWest is not yet material to our overall results, I am confident that it will drive significant shareholder value in the future. The strong performance we have seen in the versatile side of our business continued in the first quarter and is now complemented by a resurgence in our wear-to-work and occasion-based categories, which positions us well for the post-pandemic environment. We are on track to reach our billion dollar ecommerce demand goal and achieve a mid-single digit operating margin. The Express Way Forward strategy is moving ahead with momentum, and the inflection that we saw in the first quarter has accelerated quarter to date and we’re now exceeding 2019 comp volumes. I expect these trends will continue to improve as we move through the second quarter and I am confident that we will return to positive operating cash flow in the second quarter and positive EBITDA in the third quarter. Thank you for your continued interest in Express, and we’ll now take your questions.
Operator: Your first question comes from the line of Marni Shapiro with Retail Tracker. Your line is open.
Marni Shapiro: Hey guys, congratulations on the progress, and the stores have looked fantastic, though they need inventory in spots, in a good way. Could you talk a little bit about your best--your bestsellers are sold out, so body contour, some of the Express Essentials. Denim is a really important category for you guys, especially in the back half of the year, so could you talk to us a little bit about how you’re thinking about the store, those categories, inventory going forward, how it’s going to affect your buys, just overall as you push forward in these big new pillars in your store.
Tim Baxter: Yes, absolutely. Thanks Marni. I agree, we all agree that we do need more inventory in our stores. Our sell-throughs on both fashion and the big category distortions that you mentioned, like denim and Express Essentials, have far exceeded our expectations, particularly since the inflection point that we experienced at Easter. As we move forward, I did say our first quarter receipts, we were very conservative, they were down 25% to 2019’s first quarter receipts. As we move through the second quarter, we’ve gotten very aggressive about going after the bestsellers within the fashion assortment and the big categories that are driving the business right now, and our second quarter receipts will be plus-3%. Specifically, the two categories that you mentioned, I’ll start with Express Essentials which have been fantastic in both men’s and women’s. Body contour specifically has been explosive for us. We more than doubled our inventory from the beginning of the first quarter to the end of the first quarter, and we will more than double our inventory position in body contour again in the next six weeks, so very aggressive--we’ve taken a very aggressive stance on that category in addition to the other everyday essentials within that. Denim is the same. Our performance has been explosive. Like I said, we actually drove a double-digit increase versus 2019 in denim in the first quarter, and that trend has also accelerated as we’ve moved into the second quarter, so we’re also bolstering our inventory positions pretty significantly in denim, including in women’s denim also more than doubling our current inventory position by the time we get near the end of the second quarter.
Marni Shapiro: Okay. I don’t want to overstate this because I know there’s a lot of work to do, but body contour in particular feels like it has changed the entire look of the women’s business for you. I mean, how do you think about that? Is it just body contour or does it seep into dresses and other parts of the assortment for women’s, because it feels to me as somebody walking in the stores that it can really change the trajectory of the brand. It’s that impactful.
Tim Baxter: Thank you, we agree, and it has been that impactful. It is absolutely something that we are going after across categories. We’ve just delivered several dresses within the body contour collection. They have been outstanding. But to your point, it transcends just body contour. We’ve also had incredible success with sweaters that are body contoured, so this is an idea that we’re going to go forward with in a very, very meaningful way, not just in the core product that you see, but also within our fashion deliveries across categories.
Marni Shapiro: Fantastic. Best of luck, you guys. The stores just look great.
Tim Baxter: Thanks Marni.
Operator: Your next question comes from the line of Susan Anderson with B. Riley. Your line is open.
Susan Anderson: Hi, good morning. Nice to see the improvement in the business. I’m curious on--so you’re planning for positive EBITDA in third quarter and the back half. I guess I’m just curious, what’s the puts and takes on that, how much is planned for improvement in gross margin or SG&A reduction, and then also how much is reliant on sales I guess remaining above 2019 levels?
Perry Pericleous: Really good questions, Susan. Obviously we haven’t provided guidance in terms of our sales for the balance of the year, but based on our current plans, which obviously we exceeded our plans in the Q1 time frame from our own expectations, we’re expecting that we’re going to continue to see sequential improvements. If you look at Q1 into Q2 and then the back half of the year, those improvements will translate to obviously merchandise margin flow through and improvements there, and then continuing to leverage our buying and occupancy. We have made over the last couple of years significant improvements in our buying and occupancy through rent reductions and store closures, so we expect significant leverage there translating to gross margins in the back half of the year that are going to be approaching the 2019 levels. Then from that, obviously through the sales improvements and the expense reductions that we’ve discussed, we get into the positive EBITDA for Q3 and the back half of the year.
Susan Anderson: Okay, great. Then just on--and maybe if you could give some more details on the liquidity. I think you said you repaid $61 million of debt after the first quarter. Was that from the CARES Act money that was received after the quarter also, and then with the remainder of that money, do you plan to pay down debt? Then finally, I guess with the ATM money, is that going to all go towards debt, and if so, I’m just curious what your expectation for debt levels are after both of those funds come in, and then by the end of the year too.
Perry Pericleous: Yes, so let’s address first the CARES Act. From a CARES Act standpoint, we’ve used all the CARES Act money to pay down debt. We paid $61 million subsequent to quarter end. We’ve had really good operating cash flows in Q1, and we continue to improve on our operating cash flows. We’re going to continue to pay down both on our $50 million delayed draw term loan and we’re going to use CARES Act money for that, and then also from an ABL standpoint, we’ll use positive operating cash flows to pay those down. We haven’t provided guidance as to our debt levels at the end of the year, but I do want to address the question around the ATM. From an ATM standpoint, we believe it’s prudent to have the ATM on file, and it’s effective, as you may know, through April of 2024 and simply provides us with optionality for future years. At this point, we haven’t really discussed or disclosed when and how we will be in the market. It’s something that obviously we won’t be disclosing that ahead of time.
Susan Anderson: Okay, great. Then just one clarification - I think you guys had said that store sales plus demand were trending above 2019 levels. Is that store comp sales, or does that include ecomm? Maybe if you could just clarify what that is. I think I heard that the outlet sales were above ’19, maybe if you could talk about the full price store sales and what those trend levels are too. Thanks.
Perry Pericleous: Yes, absolutely. The comment around the above 2019 levels is based on store comp sales plus demand, so if you look at it through Memorial weekend, through that Monday of Memorial Day, that is tracking from a comp standpoint ahead of the 2019 levels. Tim mentioned in his prepared remarks that the outlets are positive from a comp standpoint and the retail business, through the acceleration that we have seen, in demand is also positive.
Susan Anderson: Got it, and what’s the plus demand represent - is that the ecomm sales, then?
Perry Pericleous: Yes.
Susan Anderson: Great, okay. That’s what I was confused on. Okay, great. Thanks so much, you guys. Good luck the rest of the year.
Tim Baxter: Thanks Susan.
Perry Pericleous: Thank you.
Operator: Your next question comes from the line of Roxanne Meyer with MKM Partners. Your line is open.
Roxanne Meyer: Great, good morning, and let me add my congratulations on the accelerated improvement. I appreciate your expectation for the sequential improvement in the gross margin, but I was hoping you could give us more perspective on gross margin versus 2019, I guess specifically for 1Q, how 1Q21 fared merch margin and buying and occupancy versus ’19, and how we should think about the merchandise margin piece, the progression towards the quarters of 2019. Thanks a lot.
Perry Pericleous: Great question. Let me address the gross margin component first. From a Q1 standpoint, our gross margin came in at 22.8%, and when you look at that compared to the 2019 level, that is down approximately 400-some basis points, and we expect the gross margin to continue to improve compared to those 2019 levels. When you look at overall for the back half of the year, we expect the gross margin to get very, very close to the 2019 level. That is a combination of continued merchandise margin improvement. Our merchandise margin in Q1 was obviously impacted by the mix of inventory, but as we move throughout the year, our inventory composition is improving significantly with the new receipts. Tim mentioned in his prepared remarks that our receipts in Q1 were down 25% - that is new fashion deliveries, and then as we move into Q2, our receipts are going to be up and we’re expecting our merchandise margin as the inventory composition improves to continue to improve and get closer from a merchandise margin standpoint to those 2019 levels. From a buying and occupancy, given all the reductions that we have made on those line items, we’re expecting as the sales are improving, obviously the buying and occupancy should continue to expand and improve and get to levels that are higher than 2019, or better, therefore overall your gross margin getting closer to that 2019 level.
Roxanne Meyer: Okay, great. Then from a supply chain perspective, I know that shipments had been delayed on average three to four weeks, and certainly that was a factor in the first quarter. I’m assuming that’s what’s really driving your commentary around demand in general, that there are delayed shipments. Just wondering if you could talk to where your deliveries are now relative to where you’d like them in terms of being on track, and also can you actually quantify what that demand piece looks like, because you speak to it a lot. It feels like the sales trend in Q1 would have been a lot stronger if things were on time. I just want to better appreciate the qualification of demand, both in Q1 and Q2. Thanks a lot.
Matt Moellering: Sure, this is Matt. We definitely felt an impact from the transportation issues, a lot of them driven by the Port of Long Beach and then back-ups subsequent to that on the east coast as well and where we did, to your point, see those three to four-week delays. Combined with the fact that we did plan very conservatively from a receipts stand point to begin with in Q1 as we were just starting--you know, before we really started to come out of the pandemic, we were down 25% in receipts on top of that. What we had done is pushed floor sets out, about two weeks before setting the floor sets. We’re about two weeks later than originally planned on subsequent floor sets going forward, and in Q2, as Tim mentioned in his comments, the receipts will be up 3% versus down 25% in Q1. We definitely would like to have more inventory in our stores and online right now, and as we start to get more newness into our stores and our fulfillment center, we think that will definitely be a tailwind for us as we progress through Q2.
Roxanne Meyer: Okay, great. Thanks, and best of luck.
Matt Moellering: Thank you.
Operator: Your next question comes from the line of Steve Marotta with CL King & Associates. Your line is open.
Steve Marotta: Good morning Tim, Perry and Matt. Tim, maybe at a very high level you could provide a little bit of context on your current market share overlaid with, say, the number of doors that may have closed, say, in the last 15 months or simply the competitive landscape is a little bit different now again than going into the pandemic, and the opportunities that presents for you in particular categories. Thanks.
Tim Baxter: Sure, thanks Steve. As you know, we have enjoyed very strong market share penetration in categories that you would typically describe as occasion-based or wear-to-work, so we’ve had strong market share, held strong market share positions in categories like men’s suits, which has historically been our biggest business in men’s, men’s dress shirts, our second biggest business historically in men’s, big businesses like women’s dress pants, dresses, blouses, wovens have all been historical strongholds for us. Our strength in those categories was a significant headwind for us, obviously, during the pandemic, much more significant headwind than our much more casual competitors faced. Those headwinds are poised to become tailwinds as we emerge from the pandemic and as consumers begin to resume pre-pandemic activities and occasions, and going back into the office. I mentioned in my prepared remarks that we have seen that resurgence as states lift restrictions. We see a very distinct change in our business, and particularly in those categories, so as I described in my comments, we saw a major acceleration in those categories post-Easter and I expect that we will continue great progress in those categories as we move forward, particularly because, as you mentioned, many of our competitors in those categories have closed a substantial number of stores during the pandemic and the retail landscape, the physical retail landscape in those categories has changed very dramatically. How much it has changed, I think remains to be seen, so I don’t want to quantify market share--a percentage of market share that I think we can go get, but I will say that we are very aggressively going after market share in those categories. We did not walk away from them during the pandemic and we are not walking away from them going forward. We have changed our approach in many cases in those categories because the one thing that I do think customers are going to expect moving forward is comfort, and so we have infused comfort characteristics, comfort qualities across all of our categories, including categories like men’s suits and dress shirts, women’s dress pants, even dresses, so that people can be as comfortable when they are dressed for work or for an occasion as they have been throughout the pandemic.
Steve Marotta: That’s really helpful. I’ll take the balance of my questions offline. Thanks again.
Tim Baxter: Thanks.
Operator: There are no further questions at this time. I will now turn the call back to the presenters for closing remarks.
Tim Baxter: Thank you everyone. We appreciate your continued interest in Express and your continued support.
Operator: This concludes today’s conference call. Thank you for participating. You may now disconnect.
