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Express CEO: Denim Is the New ‘Core’ Fashion

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Express closed out 2020 still struggling to get back on its feet, with fourth-quarter sales decreasing 29 percent to $430.3 million, falling short of FactSet’s estimates for $490 million. The company did manage to trim its bottom line losses though, with a net loss of $53.3 million compared to year-ago losses reaching $141.6 million. The adjusted loss of 66 cents a share surpassed the FactSet consensus, which projected a per-share dip of 83 cents.

With e-commerce traffic, transactions and conversions all positive in the quarter, Express unveiled it is finalizing a strategy with the intent to grow its digital channel to $1 billion in 2024. The apparel retailer will reveal the details of the strategy in the second quarter of 2021.

In a Nutshell: Express is adjusting its floorset timing—the rearranging of product in its stores—to ensure that its “Express Edit” of popular, curated apparel is appropriately reflected in line with port delays and freight cost increases.

The company is tracking the delays, with Express CEO Tim Baxter indicating in an earnings call that he feels good about his inventory mix going forward, but doesn’t feel as good about the balance in the immediate term.

“Our first spring deliveries have been delayed. And so we have not executed our March product launch yet,” Baxter said. “We are executing that next week, which is two weeks later than a year ago and three weeks later than 2019. So the percentage of our inventory right now that’s in new fresh spring fashion product is lower than I’d like it to be, but that will correct itself over the next couple of weeks.”

Inventory was $264.4 million at the end of 2020, up 20 percent compared to $220.3 million at the end of 2019. The increase was primarily driven by continued pressure on sales from the pandemic and higher than planned inventory in core, seasonless product, so much of the excess merchandise in in basics, not fashion apparel.

Further inflating the retailer’s year-over-year inventory bump, Express says it made the decision in late 2019 to liquidate underperforming product, which significantly decreased the year-end 2019 inventory balance. Year-end 2020 inventory is down slightly (1 percent) when compared to the year-end 2018 inventory balance.

Baxter said denim bottoms and Express essential tops are becoming the retailer’s “new core,” noting that denim customers generally spend three times more overall, with a 22 percent higher spend per transaction compared to a non-denim customer. One in four Express customers is buying denim, a record high for the retailer. Express sold over 1.6 million denim units in the fourth quarter, having launched new Supersoft and 4-Way Hyper Stretch fabrics in the period and debuting new leg shapes in the spring and summer.

Gross margin for Express was 16.6 percent of net sales compared to 27 percent in last year’s fourth quarter. The decrease was driven by the sales impact of Covid-19 and a $4.5 million impairment charge taken against certain long-lived store assets.

Express expects to close 25 stores, part of the 100 already announced to close by 2022. Including these closures, the retailer will have closed 93 stores since the beginning of 2019. But the company is diversifying its store fleet, with the opening of two Express Edit concepts in Columbus, Ohio, and Nashville.

These stores are street locations instead of mall-based stores and have a smaller footprint at 1,400 to 4,000 square feet, with a product mix curated to reflect local styles and trends within a particular market and even neighborhood. The company plans to add eight more Express Edit concept stores this year.

In February, Express revealed that it had regained compliance with the New York Stock Exchange’s continued listing standards after maintaining an average closing share price of at least $1.00 over the 30 trading-day period ending on Jan. 29. The retailer had received formal notice from the NYSE of the potential delisting in September.

As the apparel company aims to keep its liquidity position afloat, it brought in an additional $140 million in a definitive loan agreement with Sycamore Partners. The new financing includes a $90 million FILO term loan with a maturity date of May 24, 2024 and a $50 million delayed draw term loan, to be repaid upon receipt of a CARES Act tax refund expected to be received in the second quarter of 2021.

This financing is on top of Express’ existing $250 million asset-based loan facility, of which it had previously drawn $165 million.

Cash and cash equivalents totaled $55.9 million at the end of 2020, versus $207.1 million at the end of 2019. Long-term debt was $192.0 million at the end of 2020.

Express did not include many specifics for its 2021 outlook, but expects sequential comparable sales improvement throughout the year as well as “significant” gross margin improvement, even as gross margin is expected to include shipping and handling rate increases and surcharges that are continuing from the fourth quarter of 2020. The retailer expects positive operating cash flow for the full year, and positive earnings before interest, taxes, depreciation, and amortization (EBITDA) for the second half.

Express’ buying and occupancy expenses are anticipated to decrease by double digits from 2019, while selling, general, and administrative (SG&A) expenses will continue to dip by “high single digits” from two years ago. Capital expenditures should total approximately $35 million, doubling the $16.9 million spent in 2020.

Net Sales: Consolidated net sales at Express for the fourth quarter decreased 29 percent to $430.3 million from $606.7 million in the fourth quarter of 2019, while consolidated comparable sales declined 27 percent.

Comparable retail sales, which include both Express stores and e-commerce and drive 74 percent of the business, decreased 28 percent year over year, while comparable outlet sales dipped 27 percent versus the year-prior quarter.

For 2020, consolidated net sales plummeted 40 percent to $1.2 billion from approximately $2 billion in 2019, with consolidated comparable sales sliding 27 percent. Comparable retail sales for the full year decreased 29 percent compared to 2019, while comparable outlet sales saw a softer 21 percent slip.

Net Earnings: Fourth-quarter net loss was $53.3 million, or a loss of 82 cents per diluted share, and tightened up considerably from a loss of $141.6 million in the year-ago quarter. On an adjusted basis, the net loss was $43.1 million, or a loss of 66 cents per diluted share for the quarter.

Operating loss was $62.7 million compared to a loss of $189.9 million in the fourth quarter of 2019. The loss from the prior year includes approximately $205 million in intangible asset impairment and restructuring charges.

For the year, net loss was $405.4 million, or a loss of $6.27 per diluted share. On an adjusted basis, net loss was $314.3 million, or a loss of $4.86 per diluted share.

CEO’s Take: “Almost 40 percent of our assortment consisted of wear-to-work and occasion-based categories, which were disproportionately impacted by the pandemic,” Baxter told analysts. “However, the majority of this inventory is where we consider core items with low markdown risk. And as we move through the year, we expect our inventory to be more in line with our sales expectations.”

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