Notes to Consolidated Financial Statements
1. Description of Business and Basis of Presentation
Business Description
Express is a leading fashion brand for women and men. Since 1980, Express has provided the latest apparel and accessories to help customers build a wardrobe for every occasion, offering fashion and quality at an attractive value. The Company operates nearly 600 retail and factory outlet stores in the United States and Puerto Rico, as well as an online destination.
As of February 1, 2020, Express operated 381 primarily mall-based retail stores in the United States and Puerto Rico as well as 214 factory outlet stores. Additionally, as of February 1, 2020, the Company earned revenue from 12 franchise stores in Latin America. These franchise stores are operated by franchisees pursuant to franchise agreements. Under the franchise agreements, the franchisees operate stand-alone Express stores that sell Express-branded apparel and accessories purchased directly from the Company. Subsequent to year-end, one of the franchise agreements covering six franchise stores will not renew, with closures scheduled during the first quarter of 2020.
On May 4, 2017, Express announced its intention to exit the Canadian market and Express Fashion Apparel Canada Inc. and one of its wholly-owned subsidiaries filed for protection in Canada under the Companies' Creditors Arrangement Act (CCAA) with the Ontario Superior Court of Justice in Toronto. As of May 4, 2017, Canadian retail operations were deconsolidated from the Company's financial statements. Canadian financial results prior to May 4, 2017 are included in the Company's Consolidated Financial Statements. See Note 13 for additional information.
Fiscal Year
The Company's fiscal year ends on the Saturday closest to January 31. Fiscal years are referred to by the calendar year in which the fiscal year commences. All references herein to "2019", "2018", and "2017" refer to the 52-week period ended February 1, 2020, the 52-week period ended February 2, 2019, and the 53-week period ended February 3, 2018, respectively.
Basis of Presentation
Express, Inc., a holding company, owns all of the outstanding equity interests in Express Topco LLC, a holding company, which owns all of the outstanding equity interests in Express Holding, LLC ("Express Holding"). Express Holding owns all of the outstanding equity interests in Express, LLC. Express, LLC, together with its subsidiaries, including Express Fashion Operations, LLC, conducts the operations of the Company.
Principles of Consolidation
The Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.
Segment Reporting
The Company defines an operating segment on the same basis that it uses to evaluate performance internally. The Company has determined that, together, its Chief Executive Officer and its President and Chief Operating Officer are the Chief Operating Decision Maker, and that there is one operating segment. Therefore, the Company reports results as a single segment, which includes the operation of its Express brick-and-mortar retail and outlet stores, e-commerce operations, and franchise operations.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the Consolidated Financial Statements and the reported amounts of revenue and expense during the reporting period, as well as the related disclosure of contingent assets and liabilities as of the date of the Consolidated Financial Statements. Actual results may differ from those estimates. The Company revises its estimates and assumptions as new information becomes available.
Recently Issued Accounting Pronouncements
Leases
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, “Leases (Topic 842)” (“ASC 842”). This ASU is a comprehensive new standard that amends various aspects of existing guidance for leases and requires additional disclosures about leasing arrangements. It requires lessees to recognize lease assets and lease liabilities for most leases, including those leases previously classified as operating leases. ASC 842 requires a modified retrospective transition for leases existing at or entered into after the beginning of the earliest comparative period presented in the financial statements. In July 2018, the FASB issued ASU 2018-11, “Leases (Topic 842): Targeted Improvements,” that allows entities to recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption without adjustment to the financial statements for periods prior to adoption.
The Company adopted ASC 842 on February 3, 2019 on a modified retrospective basis and applied the new standard to all leases through a cumulative-effect adjustment to beginning retained earnings. As a result, comparative financial information has not been restated and continues to be reported under the accounting standards in effect for the respective periods. The Company elected the package of practical expedients permitted under the transition guidance within the new standard, which permitted companies not to reassess prior conclusions on lease identification, lease classification and initial direct costs. The Company did not elect the hindsight practical expedient.
On February 3, 2019, the Company recognized leases, primarily related to its stores and corporate headquarters, on its Consolidated Balance Sheet, as right-of-use assets of $1.2 billion with corresponding lease liabilities of $1.3 billion and eliminated certain existing lease-related assets and liabilities as a net adjustment to the right-of-use assets. The Company’s right-of-use assets represent a right to use underlying assets for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Lease assets and liabilities are recognized at the lease commencement date (date on which the Company gains access to the property) based on the estimated present value of lease payments over the lease term, net of landlord allowances to be received. The Company accounts for the lease and non-lease components as a single lease component for all current classes of leases. In connection with this adoption, the Company recorded a transition adjustment, which was a net reduction of retained earnings of $5.5 million. This adjustment primarily reflects the difference between the right-of-use assets and lease liabilities recorded upon adoption, the elimination of the lease financing obligations and related assets described in Note 4, including the related put option, and the recognition of the impairment, upon adoption, of certain right-of-use assets totaling $1.2 million. The adoption of the new standard had no material impact on the Consolidated Statements of Income and Comprehensive Income, or the Consolidated Statements of Cash Flows, and did not impact the Company's compliance with debt covenants.
2. Summary of Significant Accounting Policies
Cash and Cash Equivalents
Cash and cash equivalents include investments in money market funds, payments due from banks for third-party credit and debit card transactions for up to five days of sales, cash on hand, and deposits with financial institutions. As of February 1, 2020 and February 2, 2019, amounts due from banks for credit and debit card transactions totaled approximately $10.9 million and $12.5 million, respectively.
Outstanding checks not yet presented for payment amounted to $7.0 million and $8.0 million as of February 1, 2020 and February 2, 2019, respectively, and are included in accounts payable on the Consolidated Balance Sheets.
Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Assets and liabilities measured at fair value are classified using the following hierarchy, which is based upon the transparency of inputs to the valuation as of the measurement date.
Level 1- Valuation is based upon quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2- Valuation is based upon quoted prices for similar assets and liabilities in active markets or other inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
Level 3- Valuation is based upon other unobservable inputs that are significant to the fair value measurement.
Financial Assets
The following table presents the Company's financial assets measured at fair value on a recurring basis as of February 1, 2020 and February 2, 2019, aggregated by the level in the fair value hierarchy within which those measurements fall.
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February 1, 2020
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Level 1
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Level 2
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Level 3
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(in thousands)
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Money market funds
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$
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188,182
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|
|
$
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—
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|
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$
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—
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February 2, 2019
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Level 1
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Level 2
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Level 3
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(in thousands)
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Money market funds
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$
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155,014
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|
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$
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—
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|
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$
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—
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|
The money market funds are valued using quoted market prices in active markets.
Non-Financial Assets
The Company's non-financial assets, which include fixtures, equipment, improvements, right of use assets, and intangible assets, are not required to be measured at fair value on a recurring basis. However, if certain triggering events occur indicating the carrying value of these assets may not be recoverable, or annually in the case of indefinite-lived intangibles, an impairment test is required. See additional discussion under the heading "Property and Equipment, Net" and "Intangible Assets" in this note below.
The carrying amounts reflected on the Consolidated Balance Sheets for cash, cash equivalents, receivables, prepaid expenses, and payables as of February 1, 2020 and February 2, 2019 approximated their fair values.
Receivables, Net
Receivables, net consist primarily of construction allowances, receivables from the Bank related to the Card Agreement, our franchisees, and third-party resellers of our gift cards, and other miscellaneous receivables. Outstanding receivables are continuously reviewed for collectability. The Company's allowance for doubtful accounts was not significant as of February 1, 2020 or February 2, 2019.
Inventories
Inventories are principally valued at the lower of cost or net realizable value on a weighted-average cost basis. The Company writes down inventory, the impact of which is reflected in cost of goods sold, buying and occupancy costs in the Consolidated Statements of Income and Comprehensive Income, if the cost of specific inventory items on hand exceeds the amount the Company expects to realize from the ultimate sale or disposal of the inventory. These estimates are based on management's judgment regarding future demand and market conditions and analysis of historical experience. The lower of cost or net realizable value adjustment to inventory as of February 1, 2020 and February 2, 2019 was $10.4 million and $16.0 million, respectively.
The Company also records an inventory shrink reserve for estimated merchandise inventory losses between the last physical inventory count and the balance sheet date. This estimate is based on management's analysis of historical results.
Advertising
Advertising production costs are expensed at the time the promotion first appears in media, stores, or on the website. Total advertising expense totaled $114.7 million, $123.1 million, and $112.8 million in 2019, 2018, and 2017, respectively. Advertising costs are included in selling, general, and administrative expenses in the Consolidated Statements of Income and Comprehensive Income.
Property and Equipment, Net
Property and equipment are stated at cost. Depreciation of property and equipment is computed on a straight-line basis, using the following useful lives:
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Category
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Depreciable Life
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Software, including software developed for internal use
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3 - 7 years
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Store related assets and other property and equipment
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3 - 10 years
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Furniture, fixtures and equipment
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5 - 7 years
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Leasehold improvements
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Shorter of lease term or useful life of the asset, typically no longer than 10 years
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Building improvements
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6 - 30 years
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When a decision is made to dispose of property and equipment prior to the end of its previously estimated useful life, depreciation estimates are revised to reflect the use of the asset over the shortened estimated useful life. The cost of assets sold or retired and the related accumulated depreciation are removed from the accounts with any resulting gain or loss included in other operating expense (income), net, in the Consolidated Statements of Income and Comprehensive Income. Maintenance and repairs are charged to expense as incurred. Major renewals and betterments that extend useful lives are capitalized.
Property and equipment, including the right of use assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. The reviews are conducted at the store level, the lowest identifiable level of cash flow. The impairment test requires the Company to estimate the fair value of the assets and compare this to their carrying value. If the fair value of the assets are less than the carrying value, then an impairment charge is recognized and the non-financial assets are recorded at fair value. The Company estimates the fair value using a discounted cash flow model. Factors used in the evaluation include, but are not limited to, management's plans for future operations, recent operating results, and projected cash flows. In 2019, as a result of decreased performance in certain stores, the Company recognized impairment charges of $4.4 million related to 8 stores. In 2018, the Company recognized impairment charges of $0.8 million related to 3 stores. In 2017, the Company recognized impairment charges of $4.4 million related to 12 stores. In addition, during 2017, the Company recognized $5.5 million related to its 17 Canadian stores, all of which were fully impaired and are now closed. With the exception of the Canadian impairment, impairment charges are recorded in cost of goods sold, buying and occupancy costs in the Consolidated Statements of Income and Comprehensive Income. The Canadian impairment was recorded in restructuring costs in the Consolidated Statements of Income and Comprehensive Income. See Note 13 for further discussion of the exit of the Canadian operations.
Intangible Assets
The Company has intangible assets, which consist primarily of the Express and related tradenames and its Internet domain names. Intangible assets with indefinite lives are reviewed for impairment annually in the fourth quarter and may be reviewed more frequently if indicators of impairment are present. In the fourth quarter of 2019, the Company performed an impairment test of its indefinite-lived intangible assets. As a result of this impairment test, the Company recognized an impairment charge totaling $197.6 million related to its indefinite lived intangible assets. There are no remaining indefinite lived intangible assets as a result of the impairment charge. See Note 5 for further discussion.
The Company did not incur any impairment charges on indefinite lived intangible assets in 2018 or 2017.
Investment in Equity Interests
In 2016, the Company made a $10.1 million investment in Homage, LLC, a privately held retail company based in Columbus, Ohio. The non-controlling investment in the entity is being accounted for under the equity method. Under the terms of the agreement governing the investment, the Company's investment was increased by $0.5 million during 2018 and 2019 as the result of an accrual of a non-cash preferred yield. This investment is assessed for impairment whenever factors indicate an other-than-temporary loss in value. Factors providing evidence of such a loss include the fair value of an investment that is less than its carrying value, absence of an ability to recover the carrying value or the investee’s inability to generate income sufficient to justify the carrying value. As a result of this assessment in 2018, the Company determined the carrying value exceeded the fair value and recognized an $8.4 million impairment charge in 2018 within other expense/(income), net in the Consolidated Statements of Income and Comprehensive Income. In addition, during 2019, the Company recognized an additional $0.5 million impairment charge within other expense/(income), net in the Consolidated Statements of Income and
Comprehensive Income. The remaining $2.7 million investment, inclusive of the $1.5 million preferred yield, is included in other assets on the Consolidated Balance Sheets. The fair value of the equity method investment was determined based on applying income and market approaches. The income approach relied on the discounted cash flow method and the market approach relied on a market multiple approach considering historical and projected financial results.
Income Taxes
The Company accounts for income taxes using the asset and liability method. Under this method, the amount of taxes currently payable or refundable are accrued, and deferred tax assets and liabilities are recognized for the estimated future tax consequences of temporary differences that currently exist between the tax basis and financial reporting basis of the Company's assets and liabilities. Valuation allowances are established against deferred tax assets when it is more likely than not that the realization of those deferred tax assets will not occur.
Deferred tax assets and liabilities are measured using the enacted tax rates in effect in the years when those temporary differences are expected to reverse. The effect on deferred taxes from a change in tax rate is recognized through continuing operations in the period that includes the enactment date of the change. Changes in tax laws and rates could affect recorded deferred tax assets and liabilities in the future.
A tax benefit from an uncertain tax position may be recognized when it is more-likely-than-not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. Income tax positions must meet a more-likely-than-not recognition threshold to be recognized.
The Company recognizes tax liabilities for uncertain tax positions and adjusts these liabilities when the Company's judgment changes as a result of the evaluation of new information not previously available. Due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from the current estimate of the tax liabilities. These differences will be reflected as increases or decreases to income tax expense and the effective tax rate in the period in which the new information becomes available.
Interest and penalties related to unrecognized tax benefits are recognized within income tax expense in the Consolidated Statements of Income and Comprehensive Income. Accrued interest and penalties are included within other long-term liabilities on the Consolidated Balance Sheets.
The income tax liability was $0.8 million and $8.2 million as of February 1, 2020 and February 2, 2019, respectively, and is included in accrued expenses on the Consolidated Balance Sheets. The income tax receivable was $3.0 million and $1.5 million as of February 1, 2020 and February 2, 2019, respectively, and is included in other current assets on the Consolidated Balance Sheets.
The Company may be subject to periodic audits by the Internal Revenue Service ("IRS") and other taxing authorities. These audits may challenge certain of the Company's tax positions, such as the timing and amount of deductions and allocation of taxable income to various jurisdictions.
Self-Insurance
The Company is generally self-insured in the United States for medical, workers' compensation, and general liability benefits up to certain stop-loss limits. Such costs are accrued based on known claims and estimates of incurred but not reported (“IBNR”) claims. IBNR claims are estimated using historical claim information and actuarial estimates. The accrued liability for self-insurance is included in accrued expenses on the Consolidated Balance Sheets.
Foreign Currency Translation
The Canadian dollar was the functional currency for the Company's Canadian business, prior to the deconsolidation of the Canadian subsidiary. See Note 13 for additional information. Assets and liabilities denominated in foreign currencies were translated into U.S. dollars, the reporting currency, at the exchange rate prevailing at the applicable balance sheet date. Revenues and expenses denominated in foreign currencies were translated into U.S. dollars at the monthly average exchange rate for the period. Gains or losses resulting from foreign currency transactions are included in other (income) expense, net whereas related translation adjustments are reported as an element of other comprehensive income, both of which are included in the Consolidated Statements of Income and Comprehensive Income.
Revenue Recognition
The following is information regarding the Company's major product categories and sales channels:
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2019
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2018
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2017
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(in thousands)
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Apparel
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$
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1,736,700
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$
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1,828,836
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|
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$
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1,873,376
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Accessories and other
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216,152
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222,611
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228,317
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Other revenue
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66,342
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64,897
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56,809
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Total net sales
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$
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2,019,194
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$
|
2,116,344
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|
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$
|
2,158,502
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2019
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2018
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2017
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(in thousands)
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Retail
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$
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1,467,261
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$
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1,616,123
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$
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1,736,516
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Outlet
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485,591
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|
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435,324
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|
|
365,177
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Other revenue
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66,342
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|
|
64,897
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|
|
56,809
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Total net sales
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$
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2,019,194
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|
|
$
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2,116,344
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$
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2,158,502
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In light of the progress made in transforming into an omni-channel business model and the growth of the outlet channel, during the first quarter of 2019, the Company began providing sales channel information for retail, which includes retail store and e-commerce sales, outlets, and other revenue. Historically, the Company provided sales data for stores, which included both retail and outlet stores, and e-commerce. Other revenue is unchanged from the Company’s prior classification.
Merchandise returns are reflected in the accounting records of the channel where they are physically returned. Other revenue consists primarily of sell-off revenue related to marked-out-of-stock inventory sales to third parties, shipping and handling revenue related to e-commerce activity, revenue earned from our private label credit card agreement, revenue from gift card breakage, and revenue from franchise agreements.
Revenue related to the Company’s international franchise operations was not material for any period presented and, therefore, is not reported separately from domestic revenue.
Merchandise Sales
The Company recognizes sales for in-store purchases at the point-of-sale. Revenue related to e-commerce transactions is recognized upon shipment based on the fact that control transfers to the customer at that time. The Company has made a policy election to treat shipping and handling as costs to fulfill the contract and as a result any amounts received from customers are included in the transaction price allocated to the performance obligation of providing goods with a corresponding amount accrued within cost of goods sold, buying and occupancy costs in the Consolidated Statements of Income and Comprehensive Income for amounts paid to applicable carriers. Associate discounts on merchandise purchases are classified as a reduction of net sales. Net sales excludes sales tax collected from customers and remitted to governmental authorities.
The Company also sells merchandise to multiple franchisees pursuant to different franchise agreements. Revenues may consist of sales of merchandise and/or royalties. Revenues from merchandise sold to franchisees are recorded at the time title transfers to the franchisees. Royalty revenue is based upon a percentage of the franchisee’s net sales to third parties and is earned when such sales to third parties occur.
Loyalty Program
The Company maintains a customer loyalty program in which customers earn points toward rewards for qualifying purchases and other marketing activities. Upon reaching specified point values, customers are issued a reward, which they may redeem on merchandise purchases at the Company’s stores or on its website. Generally, rewards earned must be redeemed within 60 days from the date of issuance. The Company defers a portion of merchandise sales based on the estimated standalone selling price of the points earned. This deferred revenue is recognized as certificates are redeemed or expire. To calculate this deferral, the Company makes assumptions related to card holder redemption rates based on historical experience. The loyalty liability is included in deferred revenue on the Consolidated Balance Sheets.
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2019
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2018
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(in thousands)
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Beginning balance loyalty deferred revenue
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$
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15,319
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$
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14,186
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Reduction in revenue/(revenue recognized)
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(1,256)
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|
|
1,133
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Ending balance loyalty deferred revenue
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$
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14,063
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|
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$
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15,319
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Sales Returns Reserve
The Company reduces net sales and provides a reserve for projected merchandise returns based on prior experience. Merchandise returns are often resalable merchandise and are refunded by issuing the same payment tender as the original purchase. Merchandise exchanges of the same product and price, typically due to size or color preferences, are not considered merchandise returns. The sales returns reserve was $9.1 million and $9.9 million as of February 1, 2020 and February 2, 2019, respectively, and is included in accrued expenses on the Consolidated Balance Sheets. The asset related to projected returned merchandise is included in other assets on the Consolidated Balance Sheets.
Gift Cards
The Company sells gift cards in its stores, on its e-commerce website, and through third parties. These gift cards do not expire or lose value over periods of inactivity. The Company accounts for gift cards by recognizing a liability at the time a gift card is sold. The gift card liability balance was $24.1 million, and $25.1 million as of February 1, 2020 and February 2, 2019, respectively, and is included in deferred revenue on the Consolidated Balance Sheets. The Company recognizes revenue from gift cards when they are redeemed by the customer. The Company also recognizes income on unredeemed gift cards, referred to as "gift card breakage." Gift card breakage is recognized proportionately using a time-based attribution method from issuance of the gift card to the time when it can be determined that the likelihood of the gift card being redeemed is remote and that there is no legal obligation to remit the unredeemed gift cards to relevant jurisdictions. The gift card breakage rate is based on historical redemption patterns. Gift card breakage is included in net sales in the Consolidated Statements of Income and Comprehensive Income.
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2019
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2018
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(in thousands)
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Beginning gift card liability
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$
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25,133
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|
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$
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26,737
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Issuances
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43,028
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|
|
46,977
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Redemptions
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(40,527)
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|
|
(45,076)
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Gift card breakage
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(3,492)
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|
|
(3,505)
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Ending gift card liability
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$
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24,142
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|
|
$
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25,133
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Private Label Credit Card
The Company's Card Agreement was amended on August 28, 2017 to extend the term of the arrangement through December 31, 2024. Each private label credit card bears the logo of the Express brand and can only be used at the Company’s store locations and e-commerce channel. The Bank is the sole owner of the accounts issued under the private label credit card program and absorbs the losses associated with non-payment by the private label card holders and a portion of any fraudulent usage of the accounts.
Pursuant to the Card Agreement, the Company receives amounts from the Bank during the term based on a percentage of private label credit card sales, and is also eligible to receive incentive payments for the achievement of certain performance targets. These funds are recorded as net sales in the Consolidated Statements of Income and Comprehensive Income. The Company also receives reimbursement funds from the Bank for expenses the Company incurs. These reimbursement funds are used by the Company to fund marketing and other programs associated with the private label credit card. The reimbursement funds received related to these private label credit cards are recorded as net sales in the Consolidated Statements of Income and Comprehensive Income.
In connection with the Card Agreement, the Bank agreed to pay the Company a $20.0 million refundable payment which the Company recognized upon receipt as deferred revenue within other long-term liabilities on the Consolidated Balance Sheets and began to recognize into income on a straight-line basis commencing January of calendar year 2018. As of February 1, 2020, the deferred revenue balance of $14.2 million will be recognized over the term of the amended Card Agreement within the other revenue component of net sales in the Consolidated Statements of Income and Comprehensive Income.
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2019
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2018
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(in thousands)
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Beginning balance refundable payment liability
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$
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17,028
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|
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$
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19,906
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Recognized in revenue
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(2,878)
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|
|
(2,878)
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Ending balance refundable payment liability
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$
|
14,150
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|
|
$
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17,028
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Cost of Goods Sold, Buying and Occupancy Costs
Cost of goods sold, buying and occupancy costs, includes merchandise costs, freight, inventory shrinkage, and other gross margin related expenses. Buying and occupancy expenses primarily include payroll, benefit costs, and other operating expenses for the buying departments (merchandising, design, manufacturing, and planning and allocation), distribution, e-commerce fulfillment, rent, common area maintenance, real estate taxes, utilities, maintenance, and depreciation for stores.
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 proceeds received from insurance claims and gain/loss on disposal of assets, which are included in other operating 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.
Other Operating Expense, Net
Other operating income, net primarily consists of gains/losses on disposal of assets and excess proceeds from the settlement of insurance claims.
Other Expense, Net
Other expense, net primarily consists of currency transaction gains/losses and activity related to our equity method investment in Homage.
3. Property and Equipment, Net
Property and equipment, net, consisted of:
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|
February 1, 2020
|
|
February 2, 2019
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|
(in thousands)
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Building improvements
|
$
|
16,206
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|
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$
|
86,487
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Furniture, fixtures and equipment, and software
|
525,720
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|
|
535,256
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Leasehold improvements
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406,183
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|
|
444,906
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Construction in process
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30,719
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|
|
15,911
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Other
|
811
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|
|
787
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Total
|
979,639
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|
1,083,347
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|
Less: accumulated depreciation
|
(731,309)
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|
|
(719,068)
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Property and equipment, net
|
$
|
248,330
|
|
|
$
|
364,279
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|
Depreciation expense totaled $87.9 million, $88.2 million, and $89.8 million in 2019, 2018, and 2017, respectively, excluding impairment charges discussed in Note 13.
4. Leases
The Company leases all of its store locations and its corporate headquarters, which also includes its distribution center, under operating leases. The store leases typically have initial terms of 5 to 10 years. The current lease term for the corporate headquarters expires in 2026, with one optional five-year extension period. The Company also leases certain equipment and other assets under operating leases, typically with initial terms of 3 to 5 years. The lease term includes the initial contractual term as well as any options to extend the lease when it is reasonably certain that the Company will exercise that option. Leases with an initial term of 12 months or less (short-term leases) are not recorded on the balance sheet. The Company does not currently have any material short-term leases. The Company is generally obligated for the cost of property taxes, insurance and
other landlord costs, including common area maintenance charges, relating to its leases. If these charges are fixed, they are combined with lease payments in determining the lease liability; however, if such charges are not fixed, they are considered variable lease costs and are expensed as incurred. The variable payments are not included in the measurement of the lease liability or asset. The Company’s finance leases are immaterial.
Certain lease agreements include rental payments based on a percentage of retail sales over contractual levels and others include rental payments adjusted periodically for inflation. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.
The following table is a summary of the Company’s components of net lease cost, which is included in cost of goods sold, buying and occupancy costs, in the Consolidated Statements of Income and Comprehensive Income:
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
|
(in thousands)
|
Operating lease costs
|
|
|
$
|
280,166
|
|
Variable and short-term lease costs
|
|
|
65,535
|
|
Total lease costs
|
|
|
$
|
345,701
|
|
Supplemental cash flow information related to leases is as follows:
|
|
|
|
|
|
|
2019
|
|
(in thousands)
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
Operating cash flows for operating leases
|
$
|
279,092
|
|
Right-of-use assets obtained in exchange for operating lease liabilities
|
$
|
39,851
|
|
Supplemental balance sheet information related to leases as of February 1, 2020 is as follows:
|
|
|
|
|
|
|
2019
|
Operating leases:
|
|
Weighted average remaining lease term (in years)
|
5.7
|
Weighted average discount rate
|
4.8
|
%
|
The Company’s lease agreements do not provide an implicit rate, so the Company uses an estimated incremental borrowing rate, which is derived from third-party information available at the lease commencement date, in determining the present value of lease payments. The rate used is for a secured borrowing of a similar term as the lease.
The following table reconciles the undiscounted cash flows for each of the first five years and total of the remaining years to the operating lease liabilities recorded on the Consolidated Balance Sheets as of February 1, 2020:
|
|
|
|
|
|
|
February 1, 2020
|
|
(in thousands)
|
2020
|
$
|
255,308
|
|
2021
|
238,197
|
|
2022
|
217,658
|
|
2023
|
204,465
|
|
2024
|
147,228
|
|
Thereafter
|
223,930
|
|
Total minimum lease payments
|
1,286,786
|
|
Less: amount of lease payments representing interest
|
163,308
|
|
Present value of future minimum lease payments
|
1,123,478
|
|
Less: current obligations under leases
|
226,174
|
|
Long-term lease obligations
|
$
|
897,304
|
|
Annual store rent consists of a fixed minimum amount and/or contingent rent based on a percentage of sales exceeding a stipulated amount.
Lease Financing Obligations
Prior to the adoption of ASC 842, in certain lease arrangements, the Company was involved in the construction of the building. To the extent the Company was involved in the construction of structural improvements or took construction risk prior to commencement of a lease, it was deemed the owner of the project for accounting purposes. Therefore, the Company recorded an asset in property and equipment on the Consolidated Balance Sheets, including any capitalized interest costs, and related liabilities in accrued interest and lease financing obligations in other long-term liabilities on the Consolidated Balance Sheets, for the replacement cost of the Company’s portion of the pre-existing building plus the amount of construction costs incurred by the landlord as of the balance sheet date.
The initial terms of the lease arrangements for which the Company was considered the owner are expected to expire in 2023 and 2029. The net book value of landlord-funded construction, replacement cost of pre-existing property, and capitalized interest in property and equipment on the Consolidated Balance Sheets was $56.6 million as of February 2, 2019. There was also $65.1 million of lease financing obligations as of February 2, 2019 in other long-term liabilities on the Consolidated Balance Sheets. These amounts were eliminated as part of the adoption of ASC 842.
Rent expense relating to the land was recognized on a straight-line basis. The Company did not report rent expense for the portion of the rent payment determined to be related to the buildings which were owned for accounting purposes. Rather, this portion of the rent payment under the lease was recognized as interest expense and a reduction of the lease financing obligations. This treatment was discontinued as part of the adoption of ASC 842.
In February 2016, the Company amended its lease arrangement with the landlord of the Times Square Flagship store. The amendment provided the landlord with the option to cancel the lease upon sufficient notice through December 31, 2016. The option was never exercised and therefore expired on December 31, 2016. In conjunction with amending the lease, the Company recognized an $11.4 million put option liability that was being amortized through interest expense over the remaining lease term. As of February 2, 2019, the remaining balance related to the put option was $7.5 million of which $6.7 million was included within other long-term liabilities on the Consolidated Balance Sheets. These amounts were eliminated as part of the adoption of ASC 842.
5. Intangible Assets
The following table provides the significant components of intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 1, 2020
|
|
|
|
|
|
|
|
Cost
|
|
Impairment
|
|
Accumulated
Amortization
|
|
Ending Net Balance
|
|
(in thousands)
|
|
|
|
|
|
|
Tradename/domain names/trademarks
|
$
|
197,618
|
|
|
$
|
197,618
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Licensing arrangements
|
425
|
|
|
—
|
|
|
368
|
|
|
57
|
|
|
$
|
198,043
|
|
|
$
|
197,618
|
|
|
$
|
368
|
|
|
$
|
57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 2, 2019
|
|
|
|
|
|
Cost
|
|
Accumulated
Amortization
|
|
Ending Net Balance
|
|
(in thousands)
|
|
|
|
|
Tradename/domain names/trademarks
|
$
|
197,618
|
|
|
$
|
—
|
|
|
$
|
197,618
|
|
Licensing arrangements
|
425
|
|
|
319
|
|
|
106
|
|
|
$
|
198,043
|
|
|
$
|
319
|
|
|
$
|
197,724
|
|
The Company's tradename, Internet domain names, and trademarks had indefinite lives. Licensing arrangements are amortized over a period of ten years and are included in other assets on the Consolidated Balance Sheets.
In 2018, the Company performed a quantitative analysis and determined that no impairment was necessary on its intangible assets with indefinite lives. This analysis resulted in estimated fair values that exceeded the carrying values by a more than an insignificant amount; however, the estimated fair values decreased compared to the prior year due to decreased financial results. During the fourth quarter of 2019, the Company's stock price continued to decline, which indicated the intangible assets may be impaired. As such, the Company performed the impairment test in the fourth quarter of 2019. The test, which was performed with the assistance of an outside valuation firm, used the market and income approaches, and was more significantly weighted towards the market approach due to the reduction in market capitalization throughout the year. The Company believes the decline in market capitalization was due to decreased recent profitability. This led to a non-cash impairment charge totaling $197.6 million related to its indefinite lived intangible assets.
6. Income Taxes
The provision (benefit) for income taxes consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Current:
|
(in thousands)
|
|
|
|
|
U.S. federal
|
$
|
(602)
|
|
|
$
|
7,644
|
|
|
$
|
8,415
|
|
U.S. state and local
|
(363)
|
|
|
2,480
|
|
|
1,167
|
|
Total
|
(965)
|
|
|
10,124
|
|
|
9,582
|
|
Deferred:
|
|
|
|
|
|
U.S. federal
|
(39,272)
|
|
|
371
|
|
|
(513)
|
|
U.S. state and local
|
(10,289)
|
|
|
165
|
|
|
909
|
|
Total
|
(49,561)
|
|
|
536
|
|
|
396
|
|
Income tax (benefit)/expense
|
$
|
(50,526)
|
|
|
$
|
10,660
|
|
|
$
|
9,978
|
|
The following table provides a reconciliation between the statutory federal income tax rate and the effective tax rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Federal income tax rate
|
21.0
|
%
|
|
21.0
|
%
|
|
33.7
|
%
|
State income taxes, net of federal income tax effect
|
3.4
|
%
|
|
13.2
|
%
|
|
5.6
|
%
|
Change in uncertain tax positions
|
0.4
|
%
|
|
(1.5)
|
%
|
|
(1.0)
|
%
|
Share-based compensation
|
(1.3)
|
%
|
|
5.5
|
%
|
|
7.8
|
%
|
Non-deductible executive compensation
|
(0.4)
|
%
|
|
13.8
|
%
|
|
6.9
|
%
|
Excess tax over book basis on investment in Express Canada
|
—
|
%
|
|
—
|
%
|
|
(17.5)
|
%
|
Write-off of Express Canada deferred tax assets
|
—
|
%
|
|
—
|
%
|
|
15.7
|
%
|
Change in valuation allowance
|
(0.1)
|
%
|
|
6.3
|
%
|
|
(8.4)
|
%
|
Impact of Tax Cuts and Jobs Act on deferred taxes
|
—
|
%
|
|
(1.0)
|
%
|
|
(7.1)
|
%
|
Tax credits
|
0.3
|
%
|
|
(5.0)
|
%
|
|
(2.3)
|
%
|
Other items, net
|
0.2
|
%
|
|
0.2
|
%
|
|
1.2
|
%
|
Effective tax rate
|
23.5
|
%
|
|
52.5
|
%
|
|
34.6
|
%
|
The decrease in the tax rate in 2019 compared to 2018 is primarily attributable to the large pre-tax loss from the impairment of intangible assets, partially offset by the impact on the tax rate of the share-based compensation, non-deductible executive compensation, and valuation allowance recorded in 2018.
The increase in the tax rate in 2018 compared to 2017 is primarily attributable to non-deductible executive compensation due to income tax reform, the CEO transition, and the valuation allowance recorded on the equity method investment impairment. The increase in the effective tax rate was partially offset by a lower federal corporate income tax rate in 2018 compared to 2017 due to income tax reform.
On December 22, 2017, the Tax Cuts and Jobs Act (the "TCJA") was enacted into law. The TCJA impacted the Company through the reduction in the federal corporate income tax rate from 35% to 21% and the one-time re-measurement of the Company's deferred taxes using this new lower tax rate. As a result of the reduction of the federal corporate income tax rate under TCJA, the Company remeasured its net deferred tax liabilities and recorded an income tax benefit of approximately $2.1 million in 2017. The Company completed its assessment of the final impact of the TCJA in November 2018.
The following table provides the effect of temporary differences that created deferred income taxes as of February 1, 2020 and February 2, 2019. Deferred tax assets and liabilities represent the future effects on income taxes resulting from temporary differences and carry-forwards at the end of the respective periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
February 1, 2020
|
|
February 2, 2019
|
|
(in thousands)
|
|
|
Deferred tax assets:
|
|
|
|
Accrued expenses and deferred compensation
|
$
|
9,984
|
|
|
$
|
12,163
|
|
Lease liability
|
304,942
|
|
|
—
|
|
Intangible assets
|
26,059
|
|
|
—
|
|
Rent
|
—
|
|
|
20,768
|
|
Lease financing obligations
|
—
|
|
|
20,043
|
|
Inventory
|
1,974
|
|
|
5,312
|
|
Deferred revenue
|
9,040
|
|
|
9,920
|
|
Net operating loss and tax credit carryforwards
|
2,265
|
|
|
239
|
|
Valuation allowance
|
(2,313)
|
|
|
(2,108)
|
|
Total deferred tax assets
|
351,951
|
|
|
66,337
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
Prepaid expenses
|
3,702
|
|
|
3,967
|
|
Right of use asset
|
268,779
|
|
|
—
|
|
Other
|
464
|
|
|
701
|
|
Intangible assets
|
—
|
|
|
20,694
|
|
Property and equipment
|
24,039
|
|
|
37,592
|
|
|
|
|
|
Total deferred tax liabilities
|
296,984
|
|
|
62,954
|
|
Net deferred tax asset
|
$
|
54,967
|
|
|
$
|
3,383
|
|
As of February 1, 2020, the Company had U.S. Federal net operating loss carryforwards of $2.2 million and U.S. state net operating loss carryforwards of $1.1 million. The U.S. Federal net operating losses have an indefinite carryforward period. The U.S. state net operating losses have carryforward periods of five to twenty years with varying expiration dates and certain jurisdictions have an unlimited carryforward. In addition, certain U.S. Federal tax credits generated in 2019 in the amount of $0.8 million will not be utilized in the current year due to the net operating loss. Such tax credits can be carried forward 20 years and expire in 2039. The Company also has $0.1 million in foreign tax credits, which can be carried forward 10 years and expire starting in 2028. A valuation allowance has been recorded on the foreign tax credit carryforward.
As a result of the equity method investment impairment in 2018, a valuation allowance was established in 2018 on the deferred tax asset of the investment in the amount of $2.1 million. An additional increase in the valuation allowance of the equity method investment in the amount of $0.1 million was recorded in 2019.
The Company continues to believe that it is more likely than not that the full amount of the U.S. net deferred tax assets will be realized in the future. However, if future losses are incurred, it is reasonably possible that a material valuation allowance could be established as a result of negative evidence to support the realization of such assets.
The following table summarizes the presentation of the Company’s net deferred tax assets on the Consolidated Balance Sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
February 1, 2020
|
|
February 2, 2019
|
|
(in thousands)
|
|
|
Deferred tax assets
|
$
|
54,973
|
|
|
$
|
5,442
|
|
Other long-term liabilities
|
(6)
|
|
|
(2,059)
|
|
Net deferred tax assets
|
$
|
54,967
|
|
|
$
|
3,383
|
|
Uncertain Tax Positions
The Company evaluates tax positions using a more likely than not recognition criterion.
A reconciliation of the beginning to ending unrecognized tax benefits is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 1, 2020
|
|
February 2, 2019
|
|
February 3, 2018
|
|
(in thousands)
|
|
|
|
|
Unrecognized tax benefits, beginning of year
|
$
|
1,928
|
|
|
$
|
2,398
|
|
|
$
|
3,104
|
|
Gross addition for tax positions of the current year
|
—
|
|
|
42
|
|
|
118
|
|
Gross addition for tax positions of the prior year
|
300
|
|
|
—
|
|
|
30
|
|
Settlements
|
(2)
|
|
|
—
|
|
|
(147)
|
|
Reduction for tax positions of prior years
|
(240)
|
|
|
(28)
|
|
|
(46)
|
|
Lapse of statute of limitations
|
(681)
|
|
|
(484)
|
|
|
(661)
|
|
Unrecognized tax benefits, end of year
|
$
|
1,305
|
|
|
$
|
1,928
|
|
|
$
|
2,398
|
|
The amount of the above unrecognized tax benefits as of February 1, 2020, February 2, 2019, and February 3, 2018 that would impact the Company's effective tax rate, if recognized, is $1.3 million, $1.9 million, and $2.4 million, respectively.
During 2019 and 2018, the Company released gross uncertain tax positions of $0.7 million and $0.5 million, respectively, and the related accrued interest and penalties of $0.3 million and $0.1 million, respectively, as a result of the expiration of associated statutes of limitation.
The Company recognizes accrued interest and penalties related to unrecognized tax benefits as a component of income tax expense. The total amount of net interest in tax expense related to interest and penalties included in the Consolidated Statements of Income and Comprehensive Income was $(0.1) million for 2019, $0.1 million for 2018, and $0.1 million for 2017. As of February 1, 2020 and February 2, 2019, the Company had accrued interest and penalties of $0.5 million and $0.6 million, respectively.
The Company is subject to examination by the IRS for years subsequent to 2015. The Company is also generally subject to examination by various U.S. state and local and non-U.S. tax jurisdictions for the years subsequent to 2013. There are ongoing U.S. state and local audits covering tax years 2015 through 2017. The Company does not expect the results from any income tax audit to have a material impact on the Company’s financial statements.
The Company believes that over the next twelve months, it is reasonably possible that up to $0.5 million of unrecognized tax benefits could be resolved as the result of settlements of audits and the expiration of statutes of limitation. Final settlement of these issues may result in payments that are more or less than this amount, but the Company does not anticipate that the resolution of these matters will result in a material change to its consolidated financial position or results of operations.
7. Debt
On May 24, 2019, Express Holding, LLC, a wholly-owned subsidiary of the Company (“Express Holding”), and its subsidiaries entered into a First Amendment to the Second Amended and Restated $250.0 million Asset-Based Loan Credit Agreement (“Revolving Credit Facility”). The expiration date of the Revolving Credit Facility is May 24, 2024. As of February 1, 2020, there were no borrowings outstanding and approximately $197.7 million was available for borrowing under the Revolving Credit Facility.
Under the Revolving Credit Facility, revolving loans may be borrowed, repaid, and reborrowed until May 24, 2024, at which time all amounts borrowed must be repaid. Borrowings under the Revolving Credit Facility bear interest at a rate equal to either
the rate published by ICE Benchmark Administration Limited (with a floor of 0%) (the “Eurodollar Rate”) plus an applicable margin rate or the highest of (1) Wells Fargo Bank, National Association’s prime lending rate (with a floor of 0%), (2) 0.50% per annum above the federal funds rate (with a floor of 0%) or (3) 1% above the Eurodollar Rate (the “Base Rate”), in each case plus an applicable margin rate. The applicable margin rate is determined based on excess availability as determined by reference to the borrowing base. The applicable margin rate for Eurodollar Rate-based advances is 1.25% or 1.50% and the applicable margin rate for Base Rate-based advances is 0.25% or 0.50%, in each case, based on the borrowing base. Under certain circumstances, a default interest rate will apply on any overdue amount payable under the Revolving Credit Facility during the existence of an event of default at a per annum rate equal to 2.00% above the applicable interest rate for any overdue principal and 2.0% above the rate applicable for Base Rate-based advances for any other overdue interest.
The unused line fee payable under the Revolving Credit Facility is incurred at 0.20% per annum of the average daily unused revolving commitment during each quarter, payable quarterly in arrears on the first day of each May, August, November, and February. In the event that (1) an event of default has occurred and is continuing or (2) excess availability plus eligible cash collateral is less than 10.0% of the borrowing base for 5 consecutive days, such unused line fees are payable on the first day of each month.
Interest payments under the Revolving Credit Facility are due quarterly on the first day of each May, August, November, and February for Base Rate-based advances, provided, however, in the event that (1) an event of default has occurred and is continuing or (2) excess availability plus eligible cash collateral is less than 10.0% of the borrowing base for 5 consecutive days, interest payments are due on the first day of each month. Interest payments under the Revolving Credit Facility are due on the last day of the interest period for Eurodollar Rate-based advances for interest periods of 1, 2, and 3 months, and additionally every 3 months after the first day of the interest period for Eurodollar Rate-based advances for interest periods of greater than 3 months.
The Revolving Credit Facility requires Express Holding and its subsidiaries to maintain a fixed charge coverage ratio of at least 1.0:1.0 if excess availability plus eligible cash collateral is less than 10.0% of the borrowing base for 15 consecutive days. In addition, the Revolving Credit Facility contains customary covenants and restrictions on Express Holding’s and its subsidiaries’ activities, including, but not limited to, limitations on the incurrence of additional indebtedness, liens, negative pledges, guarantees, investments, loans, asset sales, mergers, acquisitions, prepayment of other debt, distributions, dividends, the repurchase of capital stock, transactions with affiliates, the ability to change the nature of its business or fiscal year, and permitted business activities. All obligations under the Revolving Credit Facility are guaranteed by Express Holding and its domestic subsidiaries (that are not borrowers) and secured by a lien on, among other assets, substantially all working capital assets including cash, accounts receivable, and inventory of Express Holding and its domestic subsidiaries.
Letters of Credit
The Company may enter into various trade letters of credit ("trade LCs") in favor of certain vendors to secure merchandise. These trade LCs are issued for a defined period of time, for specific shipments, and generally expire three weeks after the merchandise shipment date. As of February 1, 2020 and February 2, 2019, there were no outstanding trade LCs. Additionally, the Company enters into stand-by letters of credit ("stand-by LCs") on an as-needed basis to secure payment obligations for third party logistic services, merchandise purchases, and other general and administrative expenses. As of February 1, 2020 and February 2, 2019, outstanding stand-by LCs totaled $12.7 million and $3.0 million, respectively.
8. Stockholders' Equity
Share Repurchase Programs
On November 28, 2017, the Company's Board of Directors ("Board") approved a share repurchase program that authorizes the Company to repurchase up to $150.0 million of the Company’s outstanding common stock using available cash (the "2017 Repurchase Program"). The Company may repurchase shares on the open market, including through Rule 10b5-1 plans, in privately negotiated transactions, through block purchases, or otherwise in compliance with applicable laws, including Rule 10b-18 of the Securities Exchange Act of 1934, as amended. The timing and amount of stock repurchases will depend on a variety of factors, including business and market conditions as well as corporate and regulatory considerations. The share repurchase program may be suspended, modified, or discontinued at any time and the Company has no obligation to repurchase any amount of its common stock under the program. In 2017, the Company repurchased 2.1 million shares of its common stock under the 2017 Repurchase Program for an aggregate amount equal to $17.3 million, including commissions. In 2018, the Company repurchased 10.0 million shares of its common stock under the 2017 Repurchase Program for an aggregate amount equal to $83.2 million, including commissions. In 2019, the Company repurchased 4.3 million shares of its common stock under the 2017 Repurchase Program for an aggregate amount equal to $15.6 million, including commissions. As of February 1, 2020, the Company had approximately $34.2 million remaining under this authorization.
9. Share-Based Compensation
The Company records the fair value of share-based payments to employees in the Consolidated Statements of Income and Comprehensive Income as compensation expense, net of forfeitures, over the requisite service period. The Company issues shares of common stock from treasury stock, at average cost, upon exercise of stock options and vesting of restricted stock units, including those with performance conditions.
Share-Based Compensation Plans
In 2010, the Board approved, and the Company implemented, the Express, Inc. 2010 Incentive Compensation Plan (as amended, the "2010 Plan"). The 2010 Plan authorized the Compensation Committee (the "Committee") of the Board and its designees to offer eligible employees and directors cash and stock-based incentives as deemed appropriate in order to attract, retain, and reward such individuals.
On April 30, 2018, upon the recommendation of the Committee, the Board unanimously approved and adopted, subject to stockholder approval, the Express, Inc. 2018 Incentive Compensation Plan (the “2018 Plan”) to replace the 2010 Plan. On June 13, 2018, stockholders of the Company approved the 2018 Plan and all grants made subsequent to that approval will be made under the 2018 Plan. The primary change made by the 2018 Plan was to increase the number of shares of common stock available for equity-based awards by 2.4 million shares. In addition to increasing the number of shares, the Company also made several enhancements to the 2010 Plan to reflect best practices in corporate governance. The 2018 Plan incorporates these concepts and also includes several other enhancements which are practices the Company already follows but were not explicitly stated in the 2010 Plan. None of these changes will have a significant impact on the accounting for awards made under the 2018 Plan. In the third quarter of 2019, in connection with updates made by the Company to its policy regarding the clawback of incentive compensation awarded to associates, the Board approved an amendment to the 2018 Plan, solely for the purpose of updating the language regarding the recoupment of awards granted under the 2018 Plan.
The following summarizes share-based compensation expense:
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2019
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2018
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2017
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(in thousands)
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Restricted stock units and restricted stock
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$
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7,956
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$
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10,982
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$
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12,050
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Stock options
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795
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1,564
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1,958
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Performance-based restricted stock units
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(574)
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568
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—
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Total share-based compensation
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$
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8,177
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$
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13,114
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$
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14,008
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The stock compensation related income tax benefit recognized by the Company in 2019, 2018, and 2017 was $1.8 million, $2.6 million, and $2.1 million, respectively.
Restricted Stock Units
During 2019, the Company granted restricted stock units ("RSUs") under the terms of the 2018 Plan. The fair value of the RSUs is determined based on the Company's closing stock price on the day prior to the grant date in accordance with the 2018 Plan. The RSUs granted in 2019, in general, vest ratably over four years and the expense related to these RSUs will be recognized using the straight-line attribution method over this vesting period.
The Company's activity with respect to RSUs and restricted stock, including awards with performance conditions, for 2019 was as follows:
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Number of
Shares
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Grant Date
Weighted Average
Fair Value
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(in thousands, except per share amounts)
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Unvested, February 2, 2019
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3,064
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$
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8.95
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Granted
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3,900
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$
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3.72
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Vested
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(1,222)
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$
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10.01
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Forfeited
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(1,482)
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$
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6.32
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Unvested, February 1, 2020
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4,260
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$
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4.78
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The total fair value of RSUs and restricted stock that vested was $12.2 million, $13.8 million, and $8.5 million, during 2019, 2018, and 2017, respectively. As of February 1, 2020, there was approximately $13.4 million of total unrecognized compensation expense related to unvested RSUs and restricted stock, which is expected to be recognized over a weighted-average period of approximately 1.7 years.
Stock Options
During 2019, the Company granted non-qualified stock options under the terms of the 2018 Plan. The fair value of these options was determined using the Black-Scholes-Merton option-pricing model. 1.2 million of these awards cliff vest in 2 years. The remaining options granted vest ratably over 4 years. The expense for stock options is recognized using the straight-line attribution method.
The Company's activity with respect to stock options during 2019 was as follows:
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Number of
Shares
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Grant Date
Weighted Average
Exercise Price
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Weighted-Average Remaining Contractual Life
(in years)
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Aggregate Intrinsic Value
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(in thousands, except per share amounts and years)
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Outstanding, February 2, 2019
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2,379
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$
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16.40
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Granted
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2,320
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$
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2.60
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Exercised
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—
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$
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—
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Forfeited or expired
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(1,049)
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$
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16.23
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Outstanding, February 1, 2020
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3,650
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$
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7.67
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7.4
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$
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3,271
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Expected to vest at February 1, 2020
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2,299
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$
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2.96
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9.3
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$
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3,106
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Exercisable at February 1, 2020
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1,231
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$
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16.95
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3.4
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$
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—
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The following provides additional information regarding the Company's stock options:
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2019
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2018
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2017
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(in thousands, except per share amounts)
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Weighted average grant date fair value of options granted
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$
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1.25
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N/A
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$
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4.35
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Total intrinsic value of options exercised
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$
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—
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N/A
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$
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—
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As of February 1, 2020, there was approximately $2.3 million of total unrecognized compensation expense related to stock options, which is expected to be recognized over a weighted-average period of approximately 1.8 years.
The Company uses the Black-Scholes-Merton option-pricing model to value stock options granted to employees and directors. The Company's determination of the fair value of stock options is affected by the Company's stock price as well as a number of subjective and complex assumptions. These assumptions include the risk-free interest rate, the Company's expected stock price volatility over the term of the awards, expected term of the award, and dividend yield. The following are the weighted-average assumptions used in the determination of the fair value of the Company's stock options:
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2019
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2018
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2017
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Risk-free interest rate (1)
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1.93
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%
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N/A
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2.27
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%
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Price Volatility (2)
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47.27
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%
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N/A
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45.58
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%
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Expected term (years) (3)
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6.29
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N/A
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6.10
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Dividend yield (4)
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—
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N/A
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—
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(1)Represents the yield on U.S. Treasury securities with a term consistent with the expected term of the stock options.
(2)Primarily based on the historical volatility of the Company's common stock over a period consistent with the expected term of the stock options.
(3)The Company calculated the expected term assumption using the midpoint scenario, which combines historical exercise data with hypothetical exercise data for outstanding options. The Company believes this data currently represents the best estimate of the expected term of new employee options.
(4)The Company does not currently plan on paying regular dividends.
Performance-based Restricted Stock Units
In the first quarter of 2018, the Company granted performance shares to a limited number of senior executive-level employees, which entitle these employees to receive a specified number of shares of the Company’s common stock upon vesting. The number of shares earned could range between 0% and 200% of the target amount depending upon performance achieved over the three year vesting period. The performance conditions of the award include adjusted diluted earnings per share ("EPS") targets and total shareholder return (TSR) of the Company’s common stock relative to a select group of peer companies. A Monte Carlo valuation model was used to determine the fair value of the awards. The TSR performance metric is a market condition. Therefore, fair value of the awards is fixed at the measurement date and is not revised based on actual performance. The number of shares that will ultimately vest will change based on estimates of the Company’s adjusted EPS performance in relation to the pre-established targets. As of February 1, 2020, it is estimated that none of the shares granted in 2018 will vest based on the performance against predefined financial targets to date.
Cash-Settled Awards
In 2019 and 2018, the Company granted cash-settled awards to a limited number of senior executive-level employees. These awards are classified as liabilities, are valued based on the fair value of the award at the grant date and are remeasured at each reporting date until settlement with compensation expense being recognized in proportion to the completed requisite period up until date of settlement. The amount of cash earned could range between 0% and 200% of the target amount depending upon performance achieved over the three-year vesting period. The performance conditions of the award include EPS targets and TSR of the Company’s common stock relative to a select group of peer companies. A Monte Carlo valuation model is used to determine the fair value of the awards. As of February 1, 2020, $1.5 million of total unrecognized compensation cost is expected to be recognized on cash-settled awards over a weighted-average period of 2.2 years.
10. Earnings Per Share
The following table provides a reconciliation between basic and diluted weighted-average shares used to calculate basic and diluted earnings per share:
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2019
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2018
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2017
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(in thousands)
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Weighted-average shares - basic
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66,133
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72,518
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78,592
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Dilutive effect of stock options, restricted stock units, and restricted stock
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—
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721
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|
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278
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Weighted-average shares - diluted
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66,133
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73,239
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78,870
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Equity awards representing 7.5 million, 3.4 million, and 3.8 million shares of common stock were excluded from the computation of diluted earnings per share for 2019, 2018, and 2017, respectively, as the inclusion of these awards would have been anti-dilutive.
Additionally, for 2019, 0.4 million shares were excluded from the computation of diluted weighted average shares because the number of shares that will ultimately be issued is contingent on the Company's performance compared to pre-established performance goals, which have not been achieved as of February 1, 2020.
11. Retirement Benefits
The employees of the Company, if eligible, participate in a qualified defined contribution retirement plan (the “Qualified Plan”) sponsored by the Company.
Participation in the Company's Qualified Plan is available to employees who meet certain age and service requirements. The Qualified Plan permits employees to elect contributions up to the lesser of 15% of their compensation or the maximum limits allowable under the Internal Revenue Code ("IRC"). The Company matches employee contributions according to a predetermined formula. Employee contributions and Company matching contributions vest immediately.
Total expense recognized related to the Qualified Plan employer match was $4.2 million, $4.1 million, and $4.0 million in 2019, 2018, and 2017, respectively.
In addition to the Qualified Plan, participation in a non-qualified supplemental retirement plan (the "Non-Qualified Plan") was previously made available to employees who met certain age, service, job level, and compensation requirements. The Non-Qualified Plan was an unfunded plan which provided benefits beyond the IRC limits for qualified defined contribution plans. In the first quarter of 2017, the Company elected to terminate the Non-Qualified Plan effective March 31, 2017. Outstanding participant balances were distributed via lump sum in the first quarter of 2018 in the amount of $25.6 million. The Company had no further liability under the non-qualified plan as of or subsequent to February 2, 2019.
12. Commitments and Contingencies
In a complaint filed in January 2017 by Mr. Jorge Chacon in the Superior Court for the State of California for the County of Orange, certain subsidiaries of the Company were named as defendants in a representative action alleging violations of California state wage and hour statutes and other labor standards. The lawsuit seeks unspecified monetary damages and attorneys’ fees. In July 2018, former associate Ms. Christie Carr filed suit in Alameda County Superior Court for the State of California naming certain subsidiaries of the Company in a representative action alleging violations of California State wage and hour statutes and other labor standard violations. The lawsuit seeks unspecified monetary damages and attorneys’ fees. On January 28, 2019, Mr. Jorge Chacon filed a second representative action in the Superior Court for the State of California for the County of Orange alleging violations of California state wages and hour statutes and other labor standard violations. The lawsuit seeks unspecified monetary damages and attorneys' fees. The Company is vigorously defending itself against these claims and, as of February 1, 2020, has established an estimated liability based on its best estimate of the outcome of the matters.
The Company is subject to various other claims and contingencies arising out of the normal course of business. Management believes that the ultimate liability arising from such claims and contingencies, if any, is not likely to have a material adverse effect on the Company’s results of operations, financial condition, or cash flows.
13. Restructuring Costs
2019 Restructuring and Reorganization
In the fourth quarter of 2019, in connection with the announcement with the Company’s new strategy and the restructuring of the Company’s work force to align to this strategy, the Company recognized $7.3 million in restructuring and related reorganization charges. The charges were primarily related to employee severance, benefits and professional fees. As of February 1, 2020, approximately $5.7 million was unpaid and recorded in accrued expenses on the Consolidated Balance Sheet. The Company expects the majority of these costs to be paid in 2020.
Canadian Exit
In April of 2017, Express made the decision to close all 17 of its retail stores in Canada and discontinue all operations through its Canadian subsidiary, Express Fashion Apparel Canada Inc. ("Express Canada"). In connection with the plan to close all of its Canadian stores, on May 4, 2017, certain of Express, Inc.’s Canadian subsidiaries filed an application with the Ontario Superior Court of Justice (Commercial List) in Toronto (the "Court") seeking protection for Express, Inc.’s Canadian subsidiaries under the Companies’ Creditors Arrangement Act in Canada (the "Filing") and the appointment of a monitor to oversee the liquidation and wind-down process. Express Canada began conducting store closing liquidation sales in the middle of May and closed all of its Canadian stores in June of 2017. On September 27, 2017, a Joint Plan of Compromise and Arrangement (the “Plan”) which sets forth the amounts to be distributed to creditors and others in connection with the liquidation of Express Canada was sanctioned and approved by the Court and the creditors of Express Canada. The Plan is complete and all creditor distributions under the Plan have been made.
Asset Impairment
As a result of the decision to close the Canadian stores, Express determined that it was more likely than not that the fixed assets associated with the Canadian stores would be sold or otherwise disposed of prior to the end of their useful lives and therefore evaluated these assets for impairment in the first quarter of 2017. As a result of this evaluation, the Company recognized an impairment charge of $5.5 million on the fixed assets in the first quarter of 2017, which is included in restructuring costs in the Consolidated Statements of Income and Comprehensive Income.
Exit Costs
During 2017, in addition to the impairment charges noted above, the Company incurred a $6.4 million write off of the investment in Express Canada, $5.5 million in lease related accruals, $4.2 million related to the reclassification into earnings of the cumulative translation loss, and approximately $1.3 million in professional fees. During the third quarter of 2018, the Company incurred $0.2 million in lease related expenses.
In addition in 2017, the Company incurred a cash loss in the amount of $9.2 million. This amount reflected the cash and cash equivalents balance held by Express Canada at the time of deconsolidation and is a component of the write-off of the investment in Express Canada.
A $1.2 million lease related accrual as of February 3, 2018 was settled during the third quarter of 2018, at which time an additional expense of $0.2 million was recognized. The Company does not expect to incur significant additional restructuring costs and does not have any remaining liabilities related to the Canada exit.
14. Quarterly Financial Data (Unaudited)
Summarized unaudited quarterly financial results for 2019 and 2018 follows:
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|
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2019 Quarter
|
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First
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Second
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Third
|
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Fourth (1)
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|
(in thousands, except per share amounts)
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|
|
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Net sales
|
|
$
|
451,271
|
|
|
$
|
472,715
|
|
|
$
|
488,483
|
|
|
$
|
606,725
|
|
Gross profit
|
|
$
|
122,503
|
|
|
$
|
126,498
|
|
|
$
|
137,673
|
|
|
$
|
163,901
|
|
Net income/(loss)
|
|
$
|
(9,934)
|
|
|
$
|
(9,703)
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|
|
$
|
(3,105)
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|
$
|
(141,616)
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Earnings per basic share
|
|
$
|
(0.15)
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|
|
$
|
(0.14)
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|
|
$
|
(0.05)
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|
|
$
|
(2.21)
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|
Earnings per diluted share
|
|
$
|
(0.15)
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|
|
$
|
(0.14)
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|
|
$
|
(0.05)
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|
|
$
|
(2.21)
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(1) In the fourth quarter of 2019, the Company recorded an impairment charge of $197.6 million and a related tax benefit of $49.7 million.
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2018 Quarter
|
|
First
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Second
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Third
|
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Fourth
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|
(in thousands, except per share amounts)
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|
|
|
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Net sales
|
|
$
|
479,352
|
|
|
$
|
493,605
|
|
|
$
|
514,961
|
|
|
$
|
628,426
|
|
Gross profit
|
|
$
|
143,162
|
|
|
$
|
140,403
|
|
|
$
|
158,149
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|
|
$
|
173,197
|
|
Net income/(loss)
|
|
$
|
517
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|
|
$
|
2,234
|
|
|
$
|
7,967
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|
|
$
|
(1,088)
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Earnings per basic share
|
|
$
|
0.01
|
|
|
$
|
0.03
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|
|
$
|
0.11
|
|
|
$
|
(0.02)
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|
Earnings per diluted share
|
|
$
|
0.01
|
|
|
$
|
0.03
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|
|
$
|
0.11
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|
|
$
|
(0.02)
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15. Subsequent Events
On March 17, 2020, the Company provided notice to the lenders of our Revolving Credit Facility of its request to borrow$165.0 million with a proposed borrowing date of March 20, 2020. As of March 17, 2020, the current interest rate for borrowings under the Revolving Credit Facility is 2.41%.
Express Holding intends to increase its borrowings under the Revolving Credit Facility as a precautionary measure in order to increase its cash position, preserve financial flexibility and maintain liquidity and flexibility in response to the COVID-19 outbreak that caused public health officials to recommend precautions that would mitigate the spread of the virus, including warning against congregating in heavily populated areas such as malls and shopping centers, and led to the closure of all of our Express and Express Factory Outlet stores until March 27, 2020. The Company intends to hold the proceeds from the
incremental Revolving Credit Facility borrowings on the Company’s balance sheet and, in accordance with the terms of the Revolving Credit Facility, may use the proceeds in the future for working capital, general corporate or other purposes permitted thereunder.