Express, Inc. (NYSE:EXPR) Q3 2023 Earnings Call Transcript

Express, Inc. (NYSE:EXPR) Q3 2023 Earnings Call Transcript November 30, 2023

Express, Inc. beats earnings expectations. Reported EPS is $-7.09, expectations were $-7.18.

Operator: Good morning. My name is Krista, and I’ll be your conference operator today. At this time, I would like to welcome everyone to the Express Incorporated Conference Call to discuss our Third Quarter 2023 Earnings. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I would now like to hand it over to Greg Johnson, Vice President of Investor Relations. Please go ahead.

Greg Johnson: Thank you. Good morning. And welcome to our third quarter 2023 earnings conference call. Our third quarter 2023 earnings release can be found at our Investor Relations website and this call will be available for replay. I’d like to open by reminding you of the company’s Safe Harbor provisions. Today’s call may contain forward-looking statements. Any statements made during this conference call, except those containing historical facts, may be deemed to constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual future results may differ materially from those suggested in forward-looking statements due to a number of risks and uncertainties. For a description of the risks that could cause our results to differ materially from those described in forward-looking statements, please refer to our 2022 Form 10-K and our other filings with the SEC, which are posted on our Investor Relations website.

These risks and uncertainties are further detailed in the earnings release. These statements represent our current judgment. Express assumes no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. In addition, we may refer to certain non-GAAP measures. You can locate a reconciliation of any non-GAAP measures discussed in our comments to amounts reported under GAAP in our earnings release. We will also be providing financial comparisons to prior periods and our prepared remarks today refer to comparisons to the corresponding periods in 2022 unless otherwise noted. Please see the explanatory notes in the earnings release for additional details regarding the definition of certain terms.

With me today are Stewart Glendinning, Chief Executive Officer; and Mark Still, Interim Chief Financial Officer. I will now turn the call over to Stewart.

Stewart Glendinning: Thanks, Greg. Good morning, everyone. Let me begin by thanking the Board and the entire Express organization for the opportunity to lead this company. I’ve been in the consumer products industry for much of my career, managing and growing global brands, as well as serving as the Chief Financial Officer of multinational companies. My experience with consumers, operations and finance is well suited to the challenges facing Express. After joining the business, a little under three months ago, my focus has been on the pathway to recovering the company’s full profit potential. This includes accelerating our cost reduction initiatives and launching new ones intended to improve our business performance and liquidity.

Today, I’m going to share with you the results from Q3 and then discuss my early thoughts on the path to recovery. Our third quarter sales and diluted loss per share came in below the low end of our outlook ranges. The macroeconomic environment remains challenging and the consumer and competitive landscapes were highly promotional. Operating margin in the third quarter was a negative 6.3% versus a negative 6.8% the same quarter last year. This was driven by weakness in our topline, which was largely offset by strong cost savings performance in SG&A. In Brand Express, the topline was down 7% driven by weaker results in our retail and outlet stores, partially offset by a 10% increase in online sales. In the Express brand, unit sales were consistent with our expectations.

However, moving through this inventory required more extensive discounting and led to greater gross margin erosion. Keep in mind that our gross margin includes the royalty expense to WHP, which negatively impacted our gross margin by approximately 370 basis points as we did not have this expense in the same quarter in 2022. While there’s more work to be done to improve year-over-year sales results, there were several positive indicators in the quarter. Our sales performance improved sequentially from Q2, we realized $30 million of cost savings, which drove a 4% reduction in SG&A and we saw real improvement in women’s sales driven by the shift in our merchandising strategy, and while traffic was weaker than expected, our conversion rates were higher than last year.

We’re now driving improvements in our women’s business with a low single-digit positive comp anchored by strong eCommerce sales. Our men’s comp was down mid-double digits consistent with Q2 results as we continue to lap the record 2022 performance, particularly in suits. To offset this decline, we’re actively adjusting our assortment architecture through a better balance in wearing occasion, price points and a focus on more casual tops and bottoms. That said, we retain a strong market position with a high share of men’s specialty retail. UpWest grew sales by 15% versus the same quarter last year and Bonobos exceeded our expectations for the third quarter. The addition of Bonobos has allowed us to leverage our back office and is creating increased purchase leverage with suppliers.

While Express has broad market reach and penetration, Bonobos with annual revenues in excess of $200 million has a tremendous opportunity for increased awareness and household penetration to build on its existing scale. The combination of in-store fitting and online fulfillment has created strong customer retention and repeat purchase, and we expect to continue to grow the topline. Having said that, we need to reinvigorate our Brand Express performance and build a stronger foundation on which to realize the company’s full potential. Beginning last year, we faced a number of challenges, including declines in our customer file, conversion and store traffic, driven by missteps in our merchandise strategy, most notably in women’s, where we were out of balance across categories, price points and wearing occasions.

This misalignment between our assortment architectures and customer demand significantly impacted our historic sales and margins. We believe strongly there’s a path to total company improvement. Four key focus areas are expected to drive the recovery and are already underway, customer engagement, operating excellence, cost reduction and inventory management. Let me explain a little bit more about each. Now understanding consumer motivation, that is providing them with the products they want and delivering a great purchase experience are all part of ensuring customer engagement. We expect our merchandise assortment to continue to drive increased customer appeal, our marketing efforts will reinforce our product style and quality, and our associates will ensure a positive shopping experience, both online and in our stores.

Across the Board, we have opportunities to improve our operating execution. This includes cycle times, in-store execution, sourcing logistics, all parts of our business which allow us to serve customers, lower our cost base and beat the competition. As part of this effort, we expect some rationalization of our store count as we close high effort, unprofitable stores. On cost reduction, we’re making good progress and expect to meet the commitments we made. In 2023, we identified and implemented $120 million in annualized expense savings. We realized $30 million in Q3 and will realize a total of $80 million for the full year 2023. The remaining $40 million will be realized in the first half of 2024. We are committed to over $200 million in savings by 2025, which is inclusive of the $120 million in annualized savings in 2024.

It also includes $50 million in gross margin expansion opportunities by leveraging efficiencies in sourcing, production and the supply chain. This is a great start and I believe we can do even more. Lastly, we’re driving changes to ensure lower inventories and higher turn rates. This will not only reduce our borrowings, it will also enhance our operating effectiveness as store backrooms and warehouses are not hampered by excess product. We expect a meaningful reduction in inventory during 2024. Now, these areas are just the beginning of our efforts to return Express to profitability. In the longer term, we expect to advance our partnership with WHP Global and the opportunity here is twofold. First, earlier this month, WHP announced the signing of long-term licensing deals to bring the Express brand to Indonesia and Paraguay, grow our presence in Mexico and expand our retail footprint in Central America with the opening of four new Express retail flagship stores through 2026.

Royalties from these ventures, as well as non-core domestic licensing, will now flow into the partnership and Express will receive its 40% share net of costs. The second component of the strategic partnership is pursuing acquisitions. Our first acquisition was Bonobos, which we completed in the second quarter, and since then, Bonobos’ sales have exceeded our outlook and they’re on track to deliver positive free cash flow for the full year. We expect to leverage this agreement for further acquisitions in the years to come. Now, let me introduce Mark Still. Mark has been with the company for nearly 20 years and has just assumed the Interim CFO role. He will provide further detail on our Q3 results and outlook for the fourth quarter and the full year.

Mark?

Mark Still: Thank you, Stewart, and good morning. I’ll begin with our third quarter results. We expected consolidated net sales of $460 million to $490 million, with approximately $50 million of sales from Bonobos. Consolidated net sales actualized at $454 million, including $52 million from Bonobos. In the Express and UpWest brands combined, comparable sales declined 6%, which was a significant improvement over the 14% decline in the second quarter. eCommerce comps increased 10%, driven by improvements in our women’s business and strong conversion increases. Retail stores declined 16% and outlet stores were down 13%. Traffic declines and lapping record men’s business contributed to the ongoing challenges in these channels.

We expected gross margin to decrease approximately 200 basis points. We saw a decrease of 370 basis points as we increased promotions and had greater margin erosion than we originally anticipated. We expected approximately 275 basis points of leverage in our SG&A expenses and we actualized at leverage of 300 basis points. The leverage was driven by our cost savings initiatives, which delivered $30 million of savings in the third quarter. We expected a diluted loss per share of $5.50 to $7.50. Diluted loss per share was $9.83. Moving on to the balance sheet. At quarter close, we had $35 million of cash and cash equivalents on hand. Total borrowings were $278 million, of which $213 million was drawn against our asset-based credit facility and the remaining $65 million was drawn on our term loan, $22 million remains available under the asset-based credit facility.

Inventory increased by 14% versus last year consistent with our expectations and driven by the Bonobos acquisition. Regarding the $52 million CARES Act receivable we have mentioned previously, we are now pursuing this refund in two different pieces as a means to accelerate the payment. The first piece is for $43 million, which is agreed upon and the second piece is for $9 million, which is still under review. We expect to receive $48 million, which is comprised of the $43 million in cash related to the CARES Act receivable and a $5 million reduction in our income taxes payable for 2022. It should be noted that we will continue to pursue the remainder of our claim with the IRS. For amounts to be paid, the path forward includes approval by the IRS and the Congressional Joint Committee on Taxation.

We are actively engaged with the IRS to move this claim forward given the importance of this receivable to our liquidity. Before turning to our outlook for 2023, I want to briefly comment on our early Q4 performance. Our October trends continued into the first half of November, while in the back half of November, sales improved and were more in line with last year. With that in mind, as we turn to our outlook for 2023, our fourth quarter and full year outlooks have been updated and taken into consideration the continued uncertain consumer and macroeconomic environments balanced against our quarter-to-date performance, the impact of the $80 million in expense reductions that we will realize, as well as the expected performance of Bonobos. As a reminder, the full year of 2023 will include a 53rd week, with the fourth quarter of 2023 consisting of 14 weeks.

The 53rd week is estimated to add approximately $25 million of net sales in the fourth quarter. Our outlook for Q4, compared to the fourth quarter of 2022, is as follows. Net sales of approximately $565 million to $590 million, including the 14th week and approximately $60 million in Bonobos net sales and operating margin of negative mid-single digits. Our outlook for the full year, compared to the full year of 2022, is as follows. Net sales of approximately $1.84 billion to $1.865 billion, including the 53rd week and approximately $150 million in Bonobos net sales. Diluted loss per share of $46 to $50 and capital expenditures of approximately $25 million. And now, let me turn the call back to Stewart.

Stewart Glendinning: Thanks, Mark, and thanks for attending the call today. Our team here at Express believes in the full potential of our business, recognizes the current challenges and is actively engaged in driving the changes that will restore liquidity and move the business back to profitability. I’ll now turn the call over to the Operator and we’ll take your questions.

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Q&A Session

Operator: Thank you. [Operator Instructions] Your first question comes from the line of Dana Telsey from Telsey Advisory Group. Please go ahead.

Dana Telsey: Good morning, everyone, and welcome, Stewart, and hello, Mark. Stewart, if you’ve been there now at just a…

Stewart Glendinning: Thank you, Dana.

Dana Telsey: Hi. If you’ve been there now just around two months and you mentioned the men’s and the women’s business, what do you see to that? Where are you in the steps to getting the women’s business back on track? How are you thinking about the men’s business? What’s the process and what’s the prognosis for the timeline? And Mark…

Stewart Glendinning: Yeah.

Dana Telsey: … when you think about the store base and the online channels of distribution, how do you think about the expense structures of each? What does an opportune store base look like to you? And as we go through this holiday season, how do you think of promotions versus full price and where are you on the merchandise margin journey? Thank you.

Stewart Glendinning: All right. Well, Dana, thank you. That’s a good set of questions there. Let me pick up on the merchandising strategy, because this is actually a place where I think we’re in pretty good shape. And the reason for that is that we’ve got a new leader of this space, Michael Rangel, who is top-notch. He’s already shifted the merchandise strategy and you saw a kick in in this quarter. I mean, women had a — historically, in the last couple of years, had a pretty rough time. We saw positive comp in women this quarter. It was terrific. Our knit tops delivered better than 20% growth. Sweaters and woven tops were up. Bottoms were up. I mean, our worst category in women was tailoring and that came in at a minus 1.

So, I mean, I think, broadly, women are in good shape. Men are in a different place. They are a lot weaker and the primary reason there is that last year was such a strong year in suits and it was a tough comp for men to go up against. But even inside of men, I mean, we looked at sweaters. Michael’s team rolled out a new set of sweaters and sweater tops. That was a strongly performing category. In the spaces where we’ve moved more to casual, we’re seeing a strong performance and that’s what you’re going to see coming up in the quarters to come.

Mark Still: And Dana, coming from a, sticking with the merchandise, as we think about the fourth quarter and our promotional stance versus full ticket. I would say we continue to be in a highly promotional environment, especially here in holiday. What I would say is that we are continuing to see great adoption of our go-forward product and we will continue to focus on that go-forward product. But in the midst of holiday coming out of Black Friday and moving into the Christmas period, we do expect to continue to see a very highly promotional environment. But as we move into next year and as we’ve mentioned the go-forward cost savings that we are expecting to see as we move into 2024 and 2025, we will expect to see benefit over time.

And then getting to your second part of your — yeah, second part of your question as it relates to stores versus eComm. As we mentioned in the prepared remarks, we had a plus 10 comp from an eCommerce standpoint. Saw great growth — great conversion growth especially within eComm. And as we also mentioned in the remarks, we’re going to continue to look at our store affiliate. We will continue to evaluate it. And if we have high effort, unprofitable stores, we will look at potentially closing those locations.

Dana Telsey: Got it. And then just, Stewart, as you think about the competitive landscape of Express, and obviously, when you were looking at joining the company where you wanted to take the business, how do you envision what Express should look like over the next year? What you think the steps are to reinvigorate and see Express be a growth company? Thank you.

Stewart Glendinning: Yeah. Well, great question. I’m going to reiterate some of the points that I made in the prepared remarks. But first of all, in coming to the company, I mean, I saw a really strong brand. Express has been around a long time. It’s got a loyal customer base. And I think the sort of missteps here, as best I could read the story was that, we’d gotten a little bit away from where our consumer was buying and we were serving out the set of products that were not aligned with the customer set. What you’ve seen more recently are two changes. One, us getting back to more of the Express basics, things that we’ve sold over time. And two, us moving a little bit more to where the consumer is broadly, that is to say more casual, I think, coming out of COVID, that more casual dress has persisted and our assortment will reflect that.