10-Q Q3 2012
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
 
 
FORM 10-Q
 
 
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended October 27, 2012
OR
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______ TO ______
Commission File Number 001-34742
 
EXPRESS, INC.
(Exact name of registrant as specified in its charter)
 
Delaware
 
26-2828128
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
1 Express Drive
Columbus, Ohio
 
43230
(Address of principal executive offices)
 
(Zip Code)
Telephone: (614) 474-4001
(Registrant’s telephone number, including area code)
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x   No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
x
Accelerated filer
o
 
 
 
 
Non-accelerated filer
o  (Do not check if a smaller reporting company)
Smaller reporting company
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No  x
The number of outstanding shares of the registrant’s common stock was 85,491,704 as of November 30, 2012.

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FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q ("Quarterly Report") contains forward-looking statements that are subject to risks and uncertainties. All statements other than statements of historical fact included in this Quarterly Report are forward-looking statements. Forward-looking statements give our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance, and business. You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as “anticipate,” “estimate,” “expect,” “project,” “plan,” “intend,” “believe,” “may,” “will,” “should,” “can have,” “likely,” and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events. For example, all statements we make relating to our estimated and projected costs, expenditures, cash flows, and financial results, our plans and objectives for future operations, growth or initiatives, strategies, or the expected outcome or impact of pending or threatened litigation are forward-looking statements. All forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those that we expected, including:
changes in consumer spending and general economic conditions;
our ability to identify and respond to new and changing fashion trends, customer preferences, and other related factors;
fluctuations in our sales and results of operations on a seasonal basis and due to a variety of other factors;
increased competition from other retailers;
the success of the malls and shopping centers in which our stores are located;
our dependence upon independent third parties to manufacture all of our merchandise;
the availability constraints and price volatility of raw materials and labor used to manufacture our products;
interruptions of the flow of merchandise from international manufacturers causing disruptions in our supply chain;
shortages of inventory, delayed shipments to our online customers, and harm to our reputation due to difficulties or shut-down of distribution facilities;
our reliance upon independent third-party transportation providers for substantially all of our product shipments;
our dependence upon key executive management;
our growth strategy, including our international expansion plan;
our dependence on a strong brand image;
our leasing substantial amounts of space;
the failure to find store employees that can effectively operate our stores;
our reliance on Limited Brands, Inc. ("Limited Brands") to provide us with certain key services for our business;
our reliance on information systems and any failure, inadequacy, interruption or security failure of those systems;
claims made against us resulting in litigation;
changes in laws and regulations applicable to our business;
our inability to protect our trademarks or other intellectual property rights;
our substantial indebtedness and lease obligations;
restrictions imposed by our indebtedness on our current and future operations;
fluctuations in energy costs;
changes in taxation requirements or the results of tax audits; and
impairment charges on long-lived assets.

We derive many of our forward-looking statements from our operating budgets and forecasts, which are based upon many detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors and, it is impossible for us to anticipate all factors that could affect our actual results. For the discussion of these risks and other risks and uncertainties that could cause actual results to differ materially from those contained in our forward-looking statements, please refer to “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended January 28, 2012 ("Annual Report"), filed with the Securities and Exchange Commission (“SEC”) on March 23, 2012. The forward-looking statements included in this Quarterly Report are made only as of the date hereof. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events, or otherwise, except as otherwise required by law.










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INDEX

 
 
 
PART I
 
 
 
ITEM 1.
 
 
 
ITEM 2.
 
 
 
ITEM 3.
 
 
 
ITEM 4.
 
 
 
PART II
 
 
 
ITEM 1.
 
 
 
ITEM 1A.
 
 
 
ITEM 2.
 
 
 
ITEM 3.
 
 
 
ITEM 4.
 
 
 
ITEM 5.
 
 
 
ITEM 6.



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PART I – FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS.

EXPRESS, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in Thousands, Except Per Share Amounts)
(Unaudited)
 
October 27, 2012
 
January 28, 2012
ASSETS
 
 
 
CURRENT ASSETS:
 
 
 
Cash and cash equivalents
$
102,438

 
$
152,362

Receivables, net
9,416

 
9,027

Inventories
286,877

 
208,954

Prepaid minimum rent
24,233

 
23,461

Other
28,949

 
18,232

Total current assets
451,913

 
412,036

 
 
 
 
PROPERTY AND EQUIPMENT
614,145

 
521,860

Less: accumulated depreciation
(333,279
)
 
(294,554
)
Property and equipment, net
280,866

 
227,306

 
 
 
 
TRADENAME/DOMAIN NAME
197,719

 
197,509

DEFERRED TAX ASSETS
9,640

 
12,462

OTHER ASSETS
11,216

 
12,886

Total assets
$
951,354

 
$
862,199

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
CURRENT LIABILITIES:
 
 
 
Accounts payable
$
207,472

 
$
133,679

Deferred revenue
18,524

 
27,684

Accrued bonus
85

 
14,689

Accrued expenses
87,638

 
109,161

Accounts payable and accrued expenses – related parties

 
5,997

Total current liabilities
313,719

 
291,210

 
 
 
 
LONG-TERM DEBT
198,760

 
198,539

OTHER LONG-TERM LIABILITIES
135,780

 
91,303

Total liabilities
648,259

 
581,052

 
 
 
 
COMMITMENTS AND CONTINGENCIES (Note 12)

 

 
 
 
 
STOCKHOLDERS’ EQUITY:
 
 
 
Preferred stock – $0.01 par value; 10,000 shares authorized; no shares issued or outstanding

 

Common stock – $0.01 par value; 500,000 shares authorized; 89,607 shares and 88,946 shares issued at October 27, 2012 and January 28, 2012, respectively, and 85,509 shares and 88,887 shares outstanding at October 27, 2012 and January 28, 2012, respectively
896

 
890

Additional paid-in capital
100,910

 
87,713

Accumulated other comprehensive loss
(53
)
 
(7
)
Retained earnings
267,979

 
192,654

Treasury stock – at average cost; 4,098 shares and 59 shares at October 27, 2012 and January 28, 2012, respectively
(66,637
)
 
(103
)
Total stockholders’ equity
303,095

 
281,147

Total liabilities and stockholders’ equity
$
951,354

 
$
862,199

See notes to unaudited consolidated financial statements.

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EXPRESS, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Amounts in Thousands, Except Per Share Amounts)
(Unaudited)
 
 
Thirteen Weeks Ended
 
Thirty-Nine Weeks Ended
 
October 27,
2012
 
October 29,
2011
 
October 27,
2012
 
October 29,
2011
NET SALES
$
468,527


$
486,784


$
1,419,358


$
1,400,202

COST OF GOODS SOLD, BUYING AND OCCUPANCY COSTS
316,989


310,816


932,532


896,088

Gross profit
151,538


175,968


486,826


504,114

OPERATING EXPENSES:







Selling, general, and administrative expenses
117,722


115,061


347,224


342,236

Other operating (income) expense, net
(586
)

34


(553
)

(166
)
Total operating expenses
117,136


115,095


346,671


342,070

 







OPERATING INCOME
34,402


60,873


140,155


162,044

 







INTEREST EXPENSE
4,782


6,328


14,338


27,843

INTEREST INCOME


(2
)

(1
)

(7
)
OTHER INCOME, NET
(116
)

(148
)

(104
)

(148
)
INCOME BEFORE INCOME TAXES
29,736


54,695


125,922


134,356

INCOME TAX EXPENSE
12,314


22,025


50,598


54,053

NET INCOME
$
17,422


$
32,670


$
75,324


$
80,303

 







OTHER COMPREHENSIVE INCOME:







Foreign currency translation
(49
)

2


(46
)


COMPREHENSIVE INCOME
$
17,373


$
32,672


$
75,278


$
80,303

 











EARNINGS PER SHARE:







Basic
$
0.20


$
0.37


$
0.86


$
0.91

Diluted
$
0.20


$
0.37


$
0.86


$
0.90

 







WEIGHTED AVERAGE SHARES OUTSTANDING:







Basic
85,980


88,643


87,489


88,573

Diluted
86,216


88,903


87,835


88,838

See notes to unaudited consolidated financial statements.

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EXPRESS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in Thousands)
(Unaudited)
 
 
Thirty-Nine Weeks Ended
 
October 27, 2012
 
October 29, 2011
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
75,324


$
80,303

Adjustments to reconcile net income to net cash provided by operating activities:



Depreciation and amortization
50,733


51,198

Loss on disposal of property and equipment
67


89

Excess tax benefit from share-based compensation
(409
)


Share-based compensation
12,207


7,483

Non-cash loss on extinguishment of debt


2,744

Deferred taxes
3,713


(2,764
)
Changes in operating assets and liabilities:



Receivables, net
(379
)

2,043

Inventories
(77,900
)

(93,325
)
Accounts payable, deferred revenue, and accrued expenses
18,555


10,168

Other assets and liabilities
7,231


6,404

Net cash provided by operating activities
89,142


64,343

 



CASH FLOWS FROM INVESTING ACTIVITIES:



Capital expenditures
(73,354
)

(55,915
)
Purchase of intangible assets
(210
)

(60
)
Net cash used in investing activities
(73,564
)

(55,975
)
 



CASH FLOWS FROM FINANCING ACTIVITIES:



Repayments of long-term debt arrangements


(50,087
)
Costs incurred in connection with debt arrangements and Senior Notes


(1,192
)
Payments on capital lease obligation
(41
)


Excess tax benefit from share-based compensation
409



Proceeds from share-based compensation
623


234

Repurchase of common stock
(66,534
)

(103
)
Net cash used in financing activities
(65,543
)

(51,148
)
 





EFFECT OF EXCHANGE RATE ON CASH
41



 





NET DECREASE IN CASH AND CASH EQUIVALENTS
(49,924
)

(42,780
)
CASH AND CASH EQUIVALENTS, Beginning of period
152,362


187,762

CASH AND CASH EQUIVALENTS, End of period
$
102,438


$
144,982

See notes to unaudited consolidated financial statements.

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Notes to Unaudited Consolidated Financial Statements
(Unaudited)

1. Description of Business and Basis of Presentation
Business Description

Express, Inc. ("Express" or the "Company") is a specialty apparel and accessories retailer of women's and men's merchandise, targeting the 20 to 30 year old customer. Express merchandise is sold through retail stores and the Company's website, www.express.com. As of October 27, 2012, Express operated 618 primarily mall-based stores in the United States, Canada, and Puerto Rico. Additionally, the Company earned royalties from 10 stores in the Middle East operated through a development agreement ("Development Agreement") with Alshaya Trading Co. ("Alshaya"). Under the Development Agreement, Alshaya operates stores that sell Express-branded apparel and accessories purchased directly from the Company.

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 "2012" and "2011" represent the 53-week period ended February 2, 2013 and the 52-week period ended January 28, 2012, respectively. All references herein to “the third quarter of 2012” and “the third quarter of 2011” represent the thirteen weeks ended October 27, 2012 and October 29, 2011, respectively.

Basis of Presentation

The accompanying unaudited Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, the accompanying unaudited Consolidated Financial Statements reflect all adjustments (which are of a normal recurring nature) necessary to present fairly the financial position, results of operations, and cash flows for the interim periods, but are not necessarily indicative of the results of operations to be anticipated for 2012. Therefore, these statements should be read in conjunction with the Consolidated Financial Statements and Notes thereto for the year ended January 28, 2012, included in the Company's Annual Report, filed with the SEC.

Principles of Consolidation

The unaudited Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.

2. 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 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 brick-and-mortar retail stores and e-commerce operations.
 
The following presents information regarding the Company's major product classes and sales channels:
 
Thirteen Weeks Ended
 
Thirty-Nine Weeks Ended
 
October 27, 2012
 
October 29, 2011
 
October 27, 2012
 
October 29, 2011
Classes:
(in thousands)
 
(in thousands)
Apparel
$
421,681

 
$
440,792

 
$
1,281,598

 
$
1,267,240

Accessories and other
41,424

 
41,542

 
123,200

 
118,696

Other revenue
5,422

 
4,450

 
14,560

 
14,266

Total net sales
$
468,527

 
$
486,784

 
$
1,419,358

 
$
1,400,202


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Thirteen Weeks Ended
 
Thirty-Nine Weeks Ended
 
October 27, 2012
 
October 29, 2011
 
October 27, 2012
 
October 29, 2011
Channels:
(in thousands)
 
(in thousands)
Stores
$
408,043

 
$
436,683

 
$
1,254,668

 
$
1,264,653

E-commerce
55,062

 
45,651

 
150,130

 
121,283

Other revenue
5,422

 
4,450

 
14,560

 
14,266

Total net sales
$
468,527

 
$
486,784

 
$
1,419,358

 
$
1,400,202

Other revenue consists primarily of shipping and handling revenue related to e-commerce activity, gift card breakage, and royalties from the Development Agreement.

Revenues and long-lived assets relating to the Company's international operations were not material for any period presented and are, therefore, not reported separately from domestic revenues or long-lived assets.

3. 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:
 
 
Thirteen Weeks Ended
 
Thirty-Nine Weeks Ended
 
October 27, 2012
 
October 29, 2011
 
October 27, 2012
 
October 29, 2011
 
(in thousands)
 
(in thousands)
Weighted-average shares - basic
85,980

 
88,643

 
87,489

 
88,573

Dilutive effect of stock options, restricted stock units, and restricted stock
236

 
260

 
346

 
265

Weighted-average shares - diluted
86,216

 
88,903

 
87,835

 
88,838







Equity awards representing 3.8 million and 2.4 million shares of common stock were excluded from the computation of diluted earnings per share for the thirteen and thirty-nine weeks ended October 27, 2012, respectively, as the effects of the awards would have been anti-dilutive. Equity awards representing 2.0 million and 2.3 million shares of common stock were excluded from the computation of diluted earnings per share for the thirteen and thirty-nine weeks ended October 29, 2011, respectively, as the effects of the awards would have been anti-dilutive.

Additionally, for the thirteen and thirty-nine weeks ended October 27, 2012, there were 0.3 million shares of restricted stock 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 annual performance goals.
4. Share Repurchase Program

On May 24, 2012, the Company's Board of Director's ("Board") authorized the repurchase of up to $100 million of the Company's common stock ("Repurchase Program"), which may be made from time to time in open market or privately negotiated transactions. The Repurchase Program will be funded using the Company's available cash and is expected to be executed in the 18 month period following the authorization. The Repurchase Program may be suspended, modified, or discontinued at any time, and the Company has no obligation to make repurchases of its common stock under the Repurchase Program. During the thirteen weeks ended October 27, 2012, the Company repurchased 1.3 million shares of its common stock under the Repurchase Program at an average price of $11.70 per share, totaling $15.0 million, including commissions; and through October 27, 2012, the Company repurchased 4.0 million shares of its common stock at an average price of $16.38 per share, totaling $65.1 million, including commissions.

5. Fair Value of Financial Assets

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.

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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.
The following table presents the Company's assets measured at fair value on a recurring basis as of October 27, 2012 and January 28, 2012, aggregated by the level in the fair value hierarchy within which those measurements fall.
 
 
October 27, 2012
 
Level 1
Level 2
Level 3
 
(in thousands)
U.S. treasury securities funds
$
77,456

$

$

 
 
 
January 28, 2012
 
Level 1
Level 2
Level 3
 
(in thousands)
U.S. treasury securities funds
$
131,543

$

$

The carrying amounts reflected on the unaudited Consolidated Balance Sheets for cash, cash equivalents, receivables, prepaid expenses, and payables as of October 27, 2012 and January 28, 2012 approximated their fair values.
6. Intangible Assets
The following table provides the significant components of intangible assets:
 
 
October 27, 2012
 
January 28, 2012
 
Gross Amount
 
Accumulated
Amortization 
 
 
Gross Amount
 
Accumulated
Amortization 
 
 
(in thousands)
 
(in thousands)
Tradename
$
196,144

 
$

 
$
196,144

 
$

Internet domain name/other
1,575

 

 
1,365

 

Net favorable lease obligations
19,750

 
17,427

 
19,750

 
16,275

 
$
217,469

 
$
17,427

 
$
217,259

 
$
16,275


The Company's tradename and internet domain name/other have indefinite lives. Net favorable lease obligations are amortized over a period between 5 and 7 years, which represented the remaining life of each respective lease at the evaluation date, and are included in other assets on the unaudited Consolidated Balance Sheets. Amortization expense totaled $0.4 million and $1.2 million during the thirteen and thirty-nine weeks ended October 27, 2012, respectively; and $0.4 million and $1.8 million during the thirteen and thirty-nine weeks ended October 29, 2011, respectively.

7. Related Party Transactions
The transactions described below are transactions between the Company and entities affiliated with Golden Gate Private Equity, Inc. (“Golden Gate”) and Limited Brands. Prior to July 2007, the Company operated as a division of Limited Brands. In July 2007, a Golden Gate affiliate acquired approximately 75% of the outstanding equity interests in the Company from Limited Brands, and the Company began its transition to a stand-alone Company. In May 2010, the Company launched an initial public offering ("IPO") whereby Golden Gate and Limited Brands sold a portion of their shares. Since the IPO, Golden Gate and Limited Brands gradually reduced their ownership interest in the Company. On July 29, 2011, Limited Brands sold its remaining ownership interest in the Company, and as a result of this disposition, ceased to be a related party as of the end of the second quarter of 2011. On March 19, 2012, Golden Gate sold its remaining ownership interest in the Company, and as of May 31, 2012, Golden Gate no longer had representation on the Board As a result, Golden Gate ceased to be a related party as of June 1, 2012.


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Transactions with Limited Brands

The Company is party to a logistics services agreement with an affiliate of Limited Brands. The Limited Brands affiliate provides certain inbound and outbound transportation and delivery services, distribution services, and customs and brokerage services. In addition, merchandise sourcing services are provided by Mast Global Fashions, an affiliate of Limited Brands. The Company is also party to a lease agreement with an affiliate of Limited Brands for its home office and distribution center.

The 2011 related party activity with affiliates of Limited Brands described below includes only those expenses incurred through Limited Brands' disposition of the Company's common stock on July 29, 2011. 
 
The Company incurred charges from affiliates of Limited Brands for various services, including home office rent, which are included in selling, general, and administrative expenses, and for merchandise sourcing and logistics services, including distribution center rent, which are included in cost of goods sold, buying and occupancy costs. The amounts included in the unaudited Consolidated Statements of Income and Comprehensive Income are as follows:
 
Thirty-Nine Weeks Ended
 
October 29, 2011
 
(in thousands)
Merchandise sourcing
$
198,162

Transaction and logistics services
$
24,788


Transactions with Other Golden Gate Affiliates
The Company transacts with affiliates of Golden Gate for e-commerce warehouse and fulfillment services, software license purchases, and consulting and software maintenance services. The 2012 related party activity with affiliates of Golden Gate described below includes only those expenses incurred and income earned through the date on which Golden Gate ceased to be a related party.
The Company incurred the following charges from affiliates of Golden Gate for various services, which are included primarily in cost of goods sold, buying and occupancy costs in the unaudited Consolidated Statements of Income and Comprehensive Income:
 
Thirteen Weeks Ended
 
Thirty-Nine Weeks Ended
 
October 29, 2011
 
October 27, 2012
 
October 29, 2011
 
(in thousands)
 
(in thousands)
E-commerce warehouse and fulfillment
$
7,305

 
$
8,755

 
$
21,209

Software licenses and consulting and software maintenance services
$
55

 
$
91

 
$
198

The Company provided real estate services to certain Golden Gate affiliates. Income recognized during the thirty-nine weeks ended October 27, 2012 was $0.2 million. Income recognized for these services during the thirteen and thirty-nine weeks ended October 29, 2011 was $0.1 million and $0.4 million, respectively.

During the first and second quarters of 2011, the Company repurchased $25.0 million and $24.2 million of Senior Notes, respectively, in open market transactions. Of the $49.2 million of Senior Notes repurchased, $40.0 million were held by a Golden Gate affiliate. Interest expense incurred on the Senior Notes attributable to the Golden Gate affiliate was $0.3 million, during the thirty-nine weeks ended October 27, 2012; and $0.2 million and $1.5 million during the thirteen and thirty-nine weeks ended October 29, 2011, respectively.

8. Income Taxes

The provision for income taxes is based on a current estimate of the annual effective tax rate adjusted to reflect the impact of discrete items.  The Company's quarterly effective tax rate does not reflect a benefit associated with losses related to certain foreign subsidiaries. The Company's effective tax rate was 41.4% and 40.3% for the thirteen weeks ended October 27, 2012

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and October 29, 2011, respectively. The Company's effective tax rate was 40.2% for the thirty-nine weeks ended October 27, 2012 and October 29, 2011.
The Company recorded a valuation allowance against the deferred tax assets arising from the net operating loss of foreign operations. As of January 28, 2012, the valuation allowance for net operating losses totaled $0.1 million. In addition, as of January 28, 2012, the valuation allowance for other noncurrent tax assets totaled $0.2 million.  No other valuation allowances have been provided for deferred tax assets because management believes that it is more-likely-than-not that the full amount of the net deferred tax assets will be realized in the future.
The Company does not expect material adjustments to the total amount of unrecognized tax benefits within the next 12 months, but the outcome of tax matters is uncertain and unforeseen results can occur.
During the third quarter of 2012, the Internal Revenue Service initiated an audit of the period ended January 29, 2011, which is currently on-going.

9. Lease Financing Obligations

In certain lease arrangements, the Company is involved with the construction of the building. To the extent the Company is involved in the construction of structural improvements or takes construction risk prior to commencement of a lease, it is deemed the owner of the project for accounting purposes. The Company then records an asset in property and equipment and a related financing obligation for the amount of construction-in-progress and the replacement cost of the Company's portion of the pre-existing building. Once construction is complete, the Company considers the requirements for sale-leaseback treatment, including the transfer of all risks of ownership back to the landlord, and whether the Company has any continuing involvement in the leased property. If the arrangement does not qualify for sale-leaseback treatment, the building assets subject to these obligations remain on the Company's Consolidated Balance Sheets at their historical cost, and such assets are depreciated over their remaining useful lives. The costs of construction paid by the landlord and the replacement cost of the pre-existing building are recorded as lease financing obligations in other long-term liabilities on the unaudited Consolidated Balance Sheets, and a portion of the lease payments are applied as payments of principal and interest. The selection of the interest rate for lease financing obligations is evaluated at lease inception based on the Company's incremental borrowing rate. As of October 27, 2012, the Company had recorded $23.8 million in property and equipment, along with an offsetting amount recorded as a lease financing obligation. These assets and liabilities are classified as non-cash items for purposes of the unaudited Consolidated Statements of Cash Flow.

The Company will not report rent expense for the portion of the rent payment determined to be related to the properties which are owned for accounting purposes. Rather, this portion of rental payments under the lease will be recognized as a reduction of the financing obligation and interest expense. Expense relating to the land is recognized on a straight-line basis once construction begins.

10. Debt
Borrowings outstanding consisted of the following:
 
 
October 27, 2012
 
January 28, 2012
 
(in thousands)
8 3/4% Senior Notes
$
200,850

 
$
200,850

Debt discount on Senior Notes
(2,090
)
 
(2,311
)
Total long-term debt
$
198,760

 
$
198,539


Revolving Credit Facility

On July 29, 2011, Express Holding, LLC, a wholly-owned subsidiary, ("Express Holding") and its subsidiaries entered into an Amended and Restated $200.0 million secured Asset-Based Loan Revolving Credit Facility ("Revolving Credit Facility"). As of October 27, 2012, there were no borrowings outstanding and approximately $197.9 million available under the the Revolving Credit Facility.

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% of the borrowing base for 15 consecutive days. In addition, the Revolving Credit Facility contains customary covenants and restrictions on Express Holding and its subsidiaries'

11

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activities, including, but not limited to, limitations on the incurrence of additional indebtedness; liens, negative pledges, guarantees, investments, loans, asset sales, mergers, acquisitions, and prepayment of other debt; distributions, dividends, and the repurchase of capital stock; transactions with affiliates; and the ability to change the nature of its business or its fiscal year. 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 substantially all of the assets of Express Holding and its domestic subsidiaries.
Senior Notes

On March 5, 2010, Express, LLC and Express Finance Corp. ("Express Finance"), wholly-owned subsidiaries of the Company, co-issued, in a private placement, $250.0 million of 8 3/4% Senior Notes due in 2018 (the "Senior Notes") at an offering price of 98.6% of the face value.

In the first quarter of 2011, $25.0 million of Senior Notes were repurchased on the open market at a price of 108.75% of the principal amount. In the second quarter of 2011, $24.2 million of Senior Notes were repurchased on the open market at an average price of 109.21% of the principal amount.

The indenture governing the Senior Notes contains customary covenants and restrictions on the activities of Express, LLC, Express Finance, and Express, LLC's restricted subsidiaries, including, but not limited to, the incurrence of additional indebtedness; payment of dividends or distributions in respect of capital stock or certain other restricted payments or investments; entering into agreements that restrict distributions from restricted subsidiaries; the sale or disposal of assets, including capital stock of restricted subsidiaries; transactions with affiliates; the incurrence of liens; and mergers, consolidations or the sale of substantially all of Express, LLC's assets. Certain of these covenants will be suspended if the Senior Notes are assigned an investment grade rating by both Standard & Poor and Moody's Investors Service and no default has occurred or is continuing. If either rating on the Senior Notes should subsequently decline to below investment grade, the suspended covenants will be reinstated.

Loss on Extinguishment

In connection with the Senior Notes repurchases in the first and second quarters of 2011, the Company recognized a $6.9 million loss on extinguishment of debt for the thirty-nine weeks ended October 29, 2011. Of this loss on extinguishment, $2.5 million was attributed to the write-off of unamortized debt issuance costs and unamortized discount.
In connection with the amendment and restatement of the Revolving Credit Facility in the second quarter of 2011, the Company recognized a $0.3 million loss on extinguishment of debt attributed to the write-off of unamortized debt issuance costs for the thirty-nine weeks ended October 29, 2011.

The loss on extinguishment of debt was recorded as interest expense in the unaudited Consolidated Statements of Income and Comprehensive Income. The write-offs of unamortized debt issuance costs and unamortized discounts represent a non-cash adjustment to reconcile net income to net cash provided by operating activities within the unaudited Consolidated Statements of Cash Flows.
Fair Value of Debt
The fair value of the Senior Notes was estimated using a number of factors, such as recent trade activity, size, timing, and yields of comparable bonds, and is, therefore, within Level 2 of the fair value hierarchy. As of October 27, 2012, the estimated fair value of the Senior Notes was $217.7 million.
Letters of Credit
The Company periodically enters 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 3 weeks after the merchandise shipment date. As of October 27, 2012 and January 28, 2012, there were no outstanding trade LCs. Additionally, the Company enters into stand-by letters of credit ("stand-by LCs") on an as-need basis to secure merchandise and fund other general and administrative costs. As of October 27, 2012 and January 28, 2012, outstanding stand-by LCs totaled $2.1 million and $1.8 million, respectively.

11. Share-Based Compensation

The following summarizes our share-based compensation expense:

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Thirteen Weeks Ended
 
Thirty-Nine Weeks Ended
 
October 27, 2012
 
October 29, 2011
 
October 27, 2012
 
October 29, 2011
 
(in thousands)
 
(in thousands)
Stock options
$
2,032

 
$
1,669

 
$
6,089

 
$
4,798

Restricted stock units and restricted stock
1,318

 
1,049

 
6,104

 
2,529

Restricted shares (equity issued pre-IPO)
1

 
12

 
14

 
156

Total share-based compensation
$
3,351

 
$
2,730

 
$
12,207

 
$
7,483


During the thirteen and thirty-nine weeks ended October 27, 2012, the stock compensation related income tax benefit recognized by the Company was $0.2 million and $1.7 million, respectively; and during the thirteen and thirty-nine weeks ended October 29, 2011, was minimal and $0.1 million, respectively.

Stock Options

During the thirty-nine weeks ended October 27, 2012, the Company granted stock options under the Express, Inc., 2010 Incentive Compensation Plan (the "2010 Plan"). The fair value of the stock options is determined using the Black-Scholes-Merton option-pricing model as described further below. The majority of stock options granted under the 2010 Plan vest 25% per year over 4 years and have a 10 year contractual life, however those granted to the Chief Executive Officer vest ratably over 3 years. The expense for stock options is recognized using the straight-line attribution method.
The Company's activity with respect to stock options during the thirty-nine weeks ended October 27, 2012 was as follows:
 
 
Number of
Shares 
 
Grant Date
Weighted Average
Exercise Price
 
Weighted-Average Remaining Contractual Life
 
Aggregate Intrinsic Value
 
(in thousands, except per share amounts and years)
Outstanding, January 28, 2012
2,667

 
$
17.93

 
 
 
 
Granted
576

 
$
23.98

 
 
 
 
Exercised
(35
)
 
$
17.45

 
 
 
 
Forfeited or expired
(37
)
 
$
19.80

 
 
 
 
Outstanding, October 27, 2012
3,171

 
$
19.01

 
8.3

 
$

Expected to vest at October 27, 2012
2,180

 
$
19.61

 
8.4

 
$

Exercisable at October 27, 2012
961

 
$
17.63

 
7.9

 
$

The following provides additional information regarding the Company's stock options:
 
Thirty-Nine Weeks Ended
 
October 27, 2012
(in thousands, except per share amounts)
 
Weighted average grant date fair value of options granted
$
12.79

Total intrinsic value of options exercised
$
267

Total fair value of options vested
$
6,503

As of October 27, 2012, there was approximately $17.6 million of total unrecognized compensation expense related to stock options, which is expected to be recognized over a weighted-average period of approximately 1.3 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 fair value of stock options was estimated at the grant date using the Black-Scholes-Merton option pricing model with the following weighted-average assumptions:

13

Table of Contents


 
Thirty-Nine Weeks Ended
 
October 27, 2012
 
October 29, 2011
Risk-free interest rate (1)
1.12
%
 
1.39
%
Price Volatility (2)
55.9
%
 
55.4
%
Expected term (years) (3)
6.17

 
6.25

Dividend yield (4)

 


(1)
Represents the yield on U.S. Treasury securities with a term consistent with the expected term of the stock options.
(2)
Because the Company's stock has a limited history of being publicly traded, this was based on the historical volatility of selected comparable companies over a period consistent with the expected term of the stock options. Comparable companies were selected primarily based on industry, stage of life cycle, and size. Beginning with the second anniversary of the IPO, the Company began using its own volatility as an additional input in the determination of expected volatility.
(3)
Calculated utilizing the “simplified” methodology prescribed by SAB No. 107 due to the lack of historical exercise data necessary to provide a reasonable basis upon which to estimate the term.
(4)
Based on the fact that the Company does not currently plan on paying regular dividends.
Restricted Stock Units and Restricted Stock
During the thirty-nine weeks ended October 27, 2012, the Company granted restricted stock units (“RSUs”) and restricted stock under the 2010 Plan, including 0.4 million shares of performance-based restricted stock and 0.1 million shares of performance-based RSUs. The fair value of the RSUs and restricted stock is determined based on the Company's stock price on the grant date. The expense for RSUs and restricted stock is recognized using the straight-line attribution method except for awards with performance conditions, for which the graded vesting method is used. These awards have vesting conditions with requisite service periods of 3 years for the Chief Executive Officer, 4 years for other employees, and 1 year for members of the Board. 

The Company's activity with respect to RSUs and restricted stock for the thirty-nine weeks ended October 27, 2012 was as follows:
 
 
Number of
Shares 
Grant Date
Weighted Average
Fair Value 
 
(in thousands, except per share amounts)
Unvested, January 28, 2012
900

$
18.52

Granted
826

$
24.13

Vested
(176
)
$
17.89

Forfeited
(12
)
$
21.83

Unvested, October 27, 2012
1,538

$
21.57

The total fair value/intrinsic value of RSUs and restricted stock that vested was $3.2 million and $0.1 million during the thirty-nine weeks ended October 27, 2012 and October 29, 2011, respectively. As of October 27, 2012, there was approximately $18.6 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 1.5 years.

12. Commitments and Contingencies

In a complaint filed on July 7, 2011 in the United States District Court for the Northern District of Illinois styled as Eric Wynn, et al., v. Express, LLC, Express was named as a defendant in a purported nationwide collective action alleging violations of the Fair Labor Standards Act and of applicable Illinois state wage and hour statutes related to alleged off-the-clock work. The lawsuit seeks unspecified monetary damages and attorneys' fees. In March 2012, the court granted conditional collective action certification. Express continues to vigorously defend against these claims. The Company has accrued an amount on the Consolidated Balance Sheet as of October 27, 2012 that reflects its best estimate of the potential loss, which is not expected to be material to the Consolidated Financial Statements. As the situation develops and more information becomes available, the amount of this reserve may increase or decrease accordingly.

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Table of Contents

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. Guarantor Subsidiaries
On March 5, 2010, Express, LLC and Express Finance (the “Subsidiary Issuers”), both 100% owned indirect subsidiaries of the Company, issued the Senior Notes. The Company (“Guarantor”) and certain of the Company’s indirect 100% owned subsidiaries (“Guarantor Subsidiaries”) have guaranteed, on a joint and several basis, the Company’s obligations under the Senior Notes. The guarantees are not full and unconditional because Guarantor Subsidiaries can be released and relieved of their obligations under certain customary circumstances contained in the indenture governing the Senior Notes. These circumstances include the following, so long as other applicable provisions of the indenture are adhered to: any sale or other disposition of all or substantially all of the assets of any Guarantor Subsidiary, any sale or other disposition of capital stock of any Guarantor Subsidiary, or designation of any restricted subsidiary that is a Guarantor Subsidiary as an unrestricted subsidiary. On August 26, 2012, Express, LLC contributed certain assets and liabilities to a newly created Guarantor Subsidiary. As a result, the current and prior period condensed consolidated financial information has been revised to retroactively give effect to the new structure in place as of August 26, 2012.
The following consolidating schedules present the condensed financial information on a combined basis.

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Table of Contents

EXPRESS, INC.
CONDENSED CONSOLIDATING BALANCE SHEET
(Amounts in thousands)
(Unaudited)

 
October 27, 2012
 
Express, Inc.
 
Subsidiary
Issuers
 
Guarantor
Subsidiaries
 
Other
Subsidiaries
 
Eliminations
 
Consolidated
Total
Assets
 
 
 
 
 
 
 
 
 
 
 
Current assets
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
938

 
$
74,129

 
$
24,343

 
$
3,028

 
$

 
$
102,438

Receivables, net

 
3,884

 
3,903

 
1,629

 

 
9,416

Inventories

 
18,041

 
266,010

 
2,826

 

 
286,877

Prepaid minimum rent

 
446

 
23,139

 
648

 

 
24,233

Intercompany loan receivable

 
17,596

 

 

 
(17,596
)
 

Intercompany receivable

 
55,917

 

 
5,862

 
(61,779
)
 

Other
1,066

 
24,348

 
3,525

 
10

 

 
28,949

Total current assets
2,004

 
194,361

 
320,920

 
14,003

 
(79,375
)
 
451,913

Property and equipment, net

 
41,073

 
227,766

 
12,027

 

 
280,866

Tradename/domain name

 
197,719

 

 

 

 
197,719

Investment in subsidiary
300,250

 
334,995

 

 
294,466

 
(929,711
)
 

Deferred tax assets
852

 
6,386

 
2,402

 

 

 
9,640

Other assets

 
8,066

 
3,146

 
4

 

 
11,216

Total assets
$
303,106

 
$
782,600

 
$
554,234

 
$
320,500

 
$
(1,009,086
)
 
$
951,354

Liabilities and stockholders’ equity

 

 

 

 

 
 
Current liabilities

 

 

 

 

 
 
Accounts payable
$

 
$
204,530

 
$
1,831

 
$
1,111

 
$

 
$
207,472

Deferred revenue

 
1,320

 
17,159

 
45

 

 
18,524

Accrued bonus

 

 
85

 

 

 
85

Accrued expenses
12

 
45,201

 
41,295

 
1,130

 

 
87,638

Intercompany payable

 
5,862

 
55,917

 

 
(61,779
)
 

Intercompany loan payable

 

 

 
17,596

 
(17,596
)
 

Total current liabilities
12

 
256,913

 
116,287

 
19,882

 
(79,375
)
 
313,719

Long-term debt

 
198,760

 

 

 

 
198,760

Other long-term liabilities

 
32,461

 
98,462

 
4,857

 

 
135,780

Total liabilities
12

 
488,134

 
214,749

 
24,739

 
(79,375
)
 
648,259

Commitments and Contingencies (Note 12)

 

 

 

 

 

Total stockholders’ equity
303,094

 
294,466

 
339,485

 
295,761

 
(929,711
)
 
303,095

Total liabilities and stockholders’ equity
$
303,106

 
$
782,600

 
$
554,234

 
$
320,500

 
$
(1,009,086
)
 
$
951,354









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Table of Contents

EXPRESS, INC.
CONDENSED CONSOLIDATING BALANCE SHEET
(Amounts in thousands)
(Unaudited)

 
 
January 28, 2012
 
Express, Inc.
 
Subsidiary
Issuers
 
Guarantor
Subsidiaries
 
Other
Subsidiaries
 
Eliminations
 
Consolidated
Total
Assets
 
 
 
 
 
 
 
 
 
 
 
Current assets
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
1,575

 
$
121,273

 
$
27,964

 
$
1,550

 
$

 
$
152,362

Receivables, net

 
1,917

 
5,522

 
1,588

 

 
9,027

Inventories

 
22,681

 
183,826

 
2,447

 

 
208,954

Prepaid minimum rent

 
219

 
22,766

 
476

 

 
23,461

Intercompany loan receivable

 
12,684

 

 

 
(12,684
)
 

Intercompany receivable

 

 

 
5,862

 
(5,862
)
 

Other

 
20,188

 
(1,960
)
 
4

 

 
18,232

Total current assets
1,575

 
178,962

 
238,118

 
11,927

 
(18,546
)
 
412,036

Property and equipment, net

 
31,415

 
187,286

 
8,605

 

 
227,306

Tradename/domain name

 
197,509

 

 

 

 
197,509

Investment in subsidiary
277,920

 
300,747

 

 
272,135

 
(850,802
)
 

Deferred tax assets
852

 
7,224

 
4,386

 

 

 
12,462

Other assets

 
8,956

 
3,926

 
4

 

 
12,886

Total assets
$
280,347

 
$
724,813

 
$
433,716

 
$
292,671

 
$
(869,348
)
 
$
862,199

Liabilities and stockholders’ equity
 
 
 
 
 
 
 
 
 
 
 
Current liabilities
 
 
 
 
 
 
 
 
 
 
 
Accounts payable
$

 
$
131,767

 
$
1,294

 
$
618

 
$

 
$
133,679

Deferred revenue

 
3,158

 
24,476

 
50

 

 
27,684

Accrued bonus

 
13,486

 
1,185

 
18

 

 
14,689

Accrued expenses
(800
)
 
63,899

 
44,523

 
1,539

 

 
109,161

Accounts payable and accrued expenses—related parties

 
5,997

 

 

 

 
5,997

Intercompany payable

 
5,862

 

 

 
(5,862
)
 

Intercompany loan payable

 

 

 
12,684

 
(12,684
)
 

Total current liabilities
(800
)
 
224,169

 
71,478

 
14,909

 
(18,546
)
 
291,210

Long-term debt

 
198,539

 

 

 

 
198,539

Other long-term liabilities

 
29,970

 
58,189

 
3,144

 

 
91,303

Total liabilities
(800
)
 
452,678

 
129,667

 
18,053

 
(18,546
)
 
581,052

Commitments and Contingencies (Note 12)

 

 

 

 

 

Total stockholders’ equity
281,147

 
272,135

 
304,049

 
274,618

 
(850,802
)
 
281,147

Total liabilities and stockholders’ equity
$
280,347

 
$
724,813

 
$
433,716

 
$
292,671

 
$
(869,348
)
 
$
862,199




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Table of Contents

EXPRESS, INC.
CONDENSED CONSOLIDATING STATEMENT OF INCOME AND COMPREHENSIVE INCOME
(Amounts in thousands)
(Unaudited)
 
 
Thirteen Weeks Ended October 27, 2012
 
 
 
Subsidiary
 
Guarantor
 
Other
 
 
 
Consolidated
 
Express, Inc.
 
Issuers
 
Subsidiaries
 
Subsidiaries
 
Eliminations
 
Total
Net sales
$

 
$
263,985

 
$
462,960

 
$
4,157

 
$
(262,575
)
 
$
468,527

Cost of goods sold, buying and occupancy costs

 
202,519

 
374,101

 
2,602

 
(262,233
)
 
316,989

Gross profit

 
61,466

 
88,859

 
1,555

 
(342
)
 
151,538

Selling, general, and administrative expenses
114

 
45,761

 
69,940

 
2,249

 
(342
)
 
117,722

Other operating expense (income), net

 

 
(586
)
 

 

 
(586
)
Operating income (loss)
(114
)
 
15,705

 
19,505

 
(694
)
 

 
34,402

Interest expense

 
4,771

 

 
11

 

 
4,782

Interest income

 

 

 

 

 

(Income) loss in subsidiary
(17,292
)
 
(11,038
)
 

 
(17,292
)
 
45,622

 

Other expense (income), net

 

 

 
(116
)
 

 
(116
)
Income (loss) before income taxes
17,178

 
21,972

 
19,505

 
16,703

 
(45,622
)
 
29,736

Income tax expense (benefit)
(244
)
 
4,680

 
7,878

 

 

 
12,314

Net income (loss)
$
17,422

 
$
17,292

 
$
11,627

 
$
16,703

 
$
(45,622
)
 
$
17,422

Foreign currency translation
(49
)
 
(49
)
 

 
(98
)
 
147

 
(49
)
Comprehensive income
$
17,373

 
$
17,243

 
$
11,627

 
$
16,605

 
$
(45,475
)
 
$
17,373

EXPRESS, INC.
CONDENSED CONSOLIDATING STATEMENT OF INCOME AND COMPREHENSIVE INCOME
(Amounts in thousands)
(Unaudited)
 
Thirteen Weeks Ended October 29, 2011
 
 
 
Subsidiary
 
Guarantor
 
Other
 
 
 
Consolidated
 
Express, Inc.
 
Issuers
 
Subsidiaries
 
Subsidiaries
 
Eliminations
 
Total
Net sales
$

 
$
290,893

 
$
485,463

 
$
947

 
$
(290,519
)
 
$
486,784

Cost of goods sold, buying and occupancy costs

 
203,508

 
396,070

 
1,644

 
(290,406
)
 
310,816

Gross profit

 
87,385

 
89,393

 
(697
)
 
(113
)
 
175,968

Selling, general, and administrative expenses
252

 
40,984

 
72,510

 
1,428

 
(113
)
 
115,061

Other operating expense (income), net

 

 
34

 

 

 
34

Operating income (loss)
(252
)
 
46,401

 
16,849

 
(2,125
)
 

 
60,873

Interest expense

 
6,328

 

 

 

 
6,328

Interest income

 
(2
)
 

 

 

 
(2
)
(Income) loss in subsidiary
(32,925
)
 
(8,014
)
 

 
(32,925
)
 
73,864

 

Other expense (income), net

 

 

 
(148
)
 

 
(148
)
Income (loss) before income taxes
32,673

 
48,089

 
16,849

 
30,948

 
(73,864
)
 
54,695

Income tax expense (benefit)
3

 
15,164

 
6,858

 

 

 
22,025

Net income (loss)
$
32,670

 
$
32,925

 
$
9,991

 
$
30,948

 
$
(73,864
)
 
$
32,670

Foreign currency translation
2

 
2

 

 
4

 
(6
)
 
2

Comprehensive income
$
32,672

 
$
32,927

 
$
9,991

 
$
30,952

 
$
(73,870
)
 
$
32,672


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Table of Contents

EXPRESS, INC.
CONDENSED CONSOLIDATING STATEMENT OF INCOME AND COMPREHENSIVE INCOME
(Amounts in thousands)
(Unaudited)
 
 
Thirty-Nine Weeks Ended October 27, 2012
 
 
 
Subsidiary
 
Guarantor
 
Other
 
 
 
Consolidated
 
Express, Inc.
 
Issuers
 
Subsidiaries
 
Subsidiaries
 
Eliminations
 
Total
Net sales
$

 
$
819,709

 
$
1,406,431

 
$
10,692

 
$
(817,474
)
 
$
1,419,358

Cost of goods sold, buying and occupancy costs

 
606,086

 
1,136,406

 
6,837

 
(816,797
)
 
932,532

Gross profit

 
213,623

 
270,025

 
3,855

 
(677
)
 
486,826

Selling, general, and administrative expenses
614

 
130,866

 
211,328

 
5,093

 
(677
)
 
347,224

Other operating expense (income), net

 

 
(553
)
 

 

 
(553
)
Operating income (loss)
(614
)
 
82,757

 
59,250

 
(1,238
)
 

 
140,155

Interest expense

 
14,329

 

 
9

 

 
14,338

Interest income

 
(1
)
 

 

 

 
(1
)
(Income) loss in subsidiary
(75,694
)
 
(34,177
)
 

 
(75,694
)
 
185,565

 

Other expense (income), net

 

 

 
(104
)
 

 
(104
)
Income (loss) before income taxes
75,080

 
102,606

 
59,250

 
74,551

 
(185,565
)
 
125,922

Income tax expense (benefit)
(244
)
 
26,912

 
23,930

 

 

 
50,598

Net income (loss)
$
75,324

 
$
75,694

 
$
35,320

 
$
74,551

 
$
(185,565
)
 
$
75,324

Foreign currency translation
(46
)
 
(46
)
 

 
(92
)
 
138

 
(46
)
Comprehensive income
$
75,278

 
$
75,648

 
$
35,320

 
$
74,459

 
$
(185,427
)
 
$
75,278


EXPRESS, INC.
CONDENSED CONSOLIDATING STATEMENT OF INCOME AND COMPREHENSIVE INCOME
(Amounts in thousands)
(Unaudited)
 
Thirty-Nine Weeks Ended October 29, 2011
 
 
 
Subsidiary
 
Guarantor
 
Other
 
 
 
Consolidated
 
Express, Inc.
 
Issuers
 
Subsidiaries
 
Subsidiaries
 
Eliminations
 
Total
Net sales
$

 
$
822,877

 
$
1,398,187

 
$
947

 
$
(821,809
)
 
$
1,400,202

Cost of goods sold, buying and occupancy costs

 
585,795

 
1,130,024

 
1,740

 
(821,471
)
 
896,088

Gross profit

 
237,082

 
268,163

 
(793
)
 
(338
)
 
504,114

Selling, general, and administrative expenses
1,207

 
120,276

 
219,619

 
1,472

 
(338
)
 
342,236

Other operating expense (income), net

 
(235
)
 
69

 

 

 
(166
)
Operating income (loss)
(1,207
)
 
117,041

 
48,475

 
(2,265
)
 

 
162,044

Interest expense

 
27,843

 

 

 

 
27,843

Interest income

 
(7
)
 

 

 

 
(7
)
(Income) loss in subsidiary
(81,515
)
 
(26,747
)
 

 
(81,515
)
 
189,777

 

Other expense (income), net

 

 

 
(148
)
 

 
(148
)
Income (loss) before income taxes
80,308

 
115,952

 
48,475

 
79,398

 
(189,777
)
 
134,356

Income tax expense (benefit)
5

 
34,437

 
19,611

 

 

 
54,053

Net income (loss)
$
80,303

 
$
81,515

 
$
28,864

 
$
79,398

 
$
(189,777
)
 
$
80,303

Foreign currency translation

 

 

 

 

 

Comprehensive income
$
80,303

 
$
81,515

 
$
28,864

 
$
79,398

 
$
(189,777
)
 
$
80,303


19

Table of Contents

EXPRESS, INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
(Amounts in thousands)
(Unaudited)

 
Thirty-Nine Weeks Ended October 27, 2012
 
 
 
Subsidiary
 
Guarantor
 
Other
 
 
 
Consolidated
 
Express, Inc.
 
Issuers
 
Subsidiaries
 
Subsidiaries
 
Eliminations
 
Total
Operating Activities
 
 
 
 
 
 
 
 
 
 
 
Net cash provided by (used in) operating activities
$
74

 
$
38,875

 
$
49,727

 
$
466

 
$

 
$
89,142

Investing Activities
 
 
 
 
 
 
 
 
 
 
 
Capital expenditures

 
(16,065
)
 
(53,348
)
 
(3,941
)
 

 
(73,354
)
Purchase of intangible assets

 
(210
)
 

 

 

 
(210
)
Distributions received
65,200

 

 

 
65,200

 
(130,400
)
 

Net cash provided by (used in) investing activities
65,200

 
(16,275
)
 
(53,348
)
 
61,259

 
(130,400
)
 
(73,564
)
Financing Activities
 
 
 
 
 
 
 
 
 
 
 
Payments on capital lease obligation

 
(41
)
 

 

 

 
(41
)
Excess tax benefit from share-based compensation

 
409

 

 

 

 
409

Proceeds from share-based compensation
623

 

 

 

 

 
623

Intercompany loan

 
(4,912
)
 

 
4,912

 

 

Distributions paid

 
(65,200
)
 

 
(65,200
)
 
130,400

 

Repurchase of common stock
(66,534
)
 

 

 

 

 
(66,534
)
Net cash provided by (used in) financing activities
(65,911
)
 
(69,744
)
 

 
(60,288
)
 
130,400

 
(65,543
)
 
 
 
 
 
 
 
 
 
 
 
 
Effect of exchange rate on cash

 

 

 
41

 

 
41

 
 
 
 
 
 
 
 
 
 
 
 
Net increase (decrease) in cash and cash equivalents
(637
)
 
(47,144
)
 
(3,621
)
 
1,478

 

 
(49,924
)
Cash and cash equivalents, beginning of period
1,575

 
121,273

 
27,964

 
1,550

 

 
152,362

Cash and cash equivalents, end of period
$
938

 
$
74,129

 
$
24,343

 
$
3,028

 
$

 
$
102,438











20

Table of Contents

EXPRESS, INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
(Amounts in thousands)
(Unaudited)

 
Thirty-Nine Weeks Ended October 29, 2011
 
 
 
Subsidiary
 
Guarantor
 
Other
 
 
 
Consolidated
 
Express, Inc.
 
Issuers
 
Subsidiaries
 
Subsidiaries
 
Eliminations
 
Total
Operating Activities
 
 
 
 
 
 
 
 
 
 
 
Net cash provided by (used in) operating activities
$
(265
)
 
$
15,337

 
$
52,342

 
$
(3,071
)
 
$

 
$
64,343

Investing Activities
 
 
 
 
 
 
 
 
 
 
 
Capital expenditures

 
(6,704
)
 
(46,626
)
 
(2,585
)
 

 
(55,915
)
Purchase of intangible assets

 
(60
)
 

 

 

 
(60
)
Distributions received
103

 

 

 
103

 
(206
)
 

Net cash provided by (used in) investing activities
103

 
(6,764
)
 
(46,626
)
 
(2,482
)
 
(206
)
 
(55,975
)
Financing Activities
 
 
 
 
 
 
 
 
 
 
 
Repayments of long-term debt arrangements

 
(50,087
)
 

 

 

 
(50,087
)
Costs incurred in connection with debt arrangements and Senior Notes

 
(1,192
)
 

 

 

 
(1,192
)
Proceeds from share-based compensation
234

 

 

 

 

 
234

Intercompany loan

 
(6,002
)
 

 
6,002

 

 

Distributions paid

 
(103
)
 

 
(103
)
 
206

 

Repurchase of common stock
(103
)
 

 

 

 

 
(103
)
Net cash provided by (used in) financing activities
131

 
(57,384
)
 

 
5,899

 
206

 
(51,148
)
 
 
 
 
 
 
 
 
 
 
 
 
Effect of exchange rate on cash

 

 

 

 

 

 
 
 
 
 
 
 
 
 
 
 
 
Net increase (decrease) in cash and cash equivalents
(31
)
 
(48,811
)
 
5,716

 
346

 

 
(42,780
)
Cash and cash equivalents, beginning of period
1,647

 
163,480

 
22,635

 

 

 
187,762

Cash and cash equivalents, end of period
$
1,616

 
$
114,669

 
$
28,351

 
$
346

 
$

 
$
144,982




21

Table of Contents

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion summarizes the significant factors affecting the consolidated operating results, financial condition, liquidity, and cash flows of the Company as of the dates and for the periods presented below. The following discussion and analysis should be read in conjunction with our Annual Report for the year ended January 28, 2012 and our unaudited consolidated financial statements and the related notes included in Item 1 of this Quarterly Report. This discussion contains forward-looking statements that are based on the beliefs of our management, as well as assumptions made by, and information currently available to, our management. Actual results could differ materially from those discussed in or implied by forward-looking statements as a result of various factors. See “Forward-Looking Statements.”

Overview
Express is a specialty apparel and accessories retailer offering both women's and men's merchandise. We have over 30 years of experience offering a distinct combination of style and quality at an attractive value to women and men between 20 and 30 years old. We offer our customers an assortment of fashionable apparel and accessories to address fashion needs across multiple aspects of their lifestyles, including work, casual, jeanswear, and going-out occasions.

The third quarter of 2012 was a very challenging one for our Company where we realized a decrease in traffic, which led to negative comparable store sales and a decline in gross margin. In response to our diminished performance, we re-assorted our sweater offering, introduced entry price point fashion items in key categories, and communicated clearer pricing and promotions. While we remain cautious regarding our overall performance in the fourth quarter of 2012, we believe these actions, along with continued focus on our four growth pillars, will position us well for the future. Our growth strategies, and a summary of our execution of these strategies, is presented below.

Improve Sales and Margin of Our Existing Retail Stores
The results of this growth pillar did not meet our expectations during the third quarter. Net sales per average gross square foot was $348 for the trailing 12 months ended October 27, 2012, down from $355 for the trailing 12 months ended October 29, 2011, primarily driven by decreased traffic in our stores. Net sales per average gross square foot is determined by dividing net sales (excluding e-commerce sales, shipping and handling revenue related to e-commerce, gift card breakage, and royalties) for the period by average gross square feet during the period. Additionally, we continued to see increased promotional activity in order to sell through inventory, primarily in women's, which contributed to the lower margin. Despite a decrease in traffic, men's remained solid and performed well, achieving balanced growth across categories.

Expand Our Store Base
In the third quarter of 2012, we opened 7 new stores in the United States and 1 in Canada and closed 1 store in the United States, ending the quarter with 618 locations. For the remainder of 2012, we expect to open 8 additional stores, 5 in the United States and 3 in Canada, and to close 1 store in the United States. Additionally, we have plans for 2 flagship locations, 1 in San Francisco and 1 in New York, and currently expect both flagships to open prior to the 2013 holiday season. We expect these openings to result in approximately $8.0 million of incremental pre-opening rent expense in 2012.

Expand Our e-Commerce Platform
In the third quarter of 2012, our e-commerce sales increased 21% over the third quarter of 2011. The growth in e-commerce sales was driven by increased sales of both men's and women's merchandise. E-commerce sales represented 12% of total net sales in the third quarter of 2012, and we continue to expect this channel to grow to 13-15% of total net sales.

Expand Internationally
We continue to focus on our international expansion plans with additional openings in the Middle East under our Development Agreement with Alshaya during the third quarter. At quarter end, we were earning royalties from 10 stores, a net increase of 3 stores from the second quarter of 2012. In addition, as previously announced, we have entered into 2 new franchise agreements, 1 in Mexico and 1 multi-country agreement covering certain other Latin American countries. We anticipate that we will have 3 stores operating under these new agreements by year end.

Our results to date are not necessarily indicative of the results to be expected for the full year. Such results could be impacted by a number of factors outside our control, including overall economic conditions in the United States, costs to procure and produce our product, and competitors' actions. See "Forward-Looking Statements" for additional factors.

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Table of Contents

How We Assess the Performance of Our Business
In assessing the performance of our business, we consider a variety of performance and financial measures. These key measures include net sales, comparable sales and other individual store performance factors, gross profit and selling, general, and administrative expenses.
Net Sales. Net sales reflects revenues from the sale of our merchandise, less returns and discounts, as well as shipping and handling revenue related to e-commerce, gift card breakage, and royalties earned from the Development Agreement with Alshaya.
Comparable Sales and Other Individual Store Performance Factors. Comparable sales are calculated based upon stores that were open at least thirteen full months as of the end of the reporting period and also includes e-commerce sales. A store is not considered a part of the comparable sales base if the square footage of the store changed by more than 20% due to remodel or relocation activities. We also review sales per gross square foot, average unit retail price, units per transaction, dollars per transaction, traffic, and conversion, among other things, to evaluate the performance of individual stores. We also review sales per gross square foot on a company-wide basis.
Gross Profit. Gross profit is equal to net sales minus cost of goods sold, buying and occupancy costs. Gross margin measures gross profit as a percentage of net sales. Cost of goods sold, buying and occupancy costs includes the direct cost of purchased merchandise, inventory shrinkage, inventory adjustments, inbound freight to our distribution center, outbound freight to get merchandise from our distribution center to stores, merchandising, design, planning and allocation and manufacturing/production costs, occupancy costs related to store operations (such as rent and common area maintenance, utilities, and depreciation on assets), and all logistics costs associated with our e-commerce business.
 Our cost of goods sold increases in higher volume quarters because the direct cost of purchased merchandise is tied to sales. Buying and occupancy costs are largely fixed and do not necessarily increase as volume increases. Changes in the mix of our products, such as changes in the proportion of accessories, which are generally higher margin, may also impact our overall cost of goods sold. We review our inventory levels on an on-going basis in order to identify slow-moving merchandise and generally use markdowns to clear such merchandise. The timing and level of markdowns are driven primarily by seasonality and customer acceptance of our merchandise. We use third-party vendors and company-owned outlet stores to dispose of marked-out-of-stock merchandise. We use third parties to source all of our inventory, with the primary drivers of the inventory costs being raw materials, labor in the countries where our merchandise is sourced, and logistics costs associated with transporting our merchandise.
Selling, General, and Administrative Expenses. Selling, general, and administrative expenses include all operating costs not included in cost of goods sold, buying and occupancy costs, with the exception of costs such as proceeds received from insurance claims and gain/loss on disposal of assets, which are included in other operating (income) expense, net. These costs include payroll and other expenses related to operations at our corporate home office, store expenses other than occupancy, and marketing expenses, which primarily include production, mailing, and print advertising costs. With the exception of store payroll and marketing, these expenses generally do not vary proportionally with net sales. As a result, selling, general, and administrative expenses as a percentage of net sales is usually higher in lower volume quarters and lower in higher volume quarters.
Results of Operations
The Third Quarter of 2012 Compared to the Third Quarter of 2011
The table below sets forth the various line items in the unaudited Consolidated Statements of Income and Comprehensive Income as a percentage of net sales for the third quarter of 2012 and the third quarter of 2011. Due to seasonal variations in the retail industry, the results of operations for any current period are not necessarily indicative of results expected for the full year or of future financial results. The seasonality of our operations may also lead to significant fluctuations in certain asset and liability accounts.

23

Table of Contents

 
Percentage of Net Sales
 
Thirteen Weeks Ended
 
October 27, 2012
 
October 29, 2011
Net sales
100
 %
 
100
 %
Cost of goods sold, buying and occupancy costs
68
 %
 
64
 %
Gross profit
32
 %
 
36
 %
Selling, general, and administrative expenses
25
 %
 
24
 %
Other operating (income) expense, net
 %
 
 %
Operating income
7
 %
 
13
 %
Interest expense
1
 %
 
1
 %
Interest income
 %
 
 %
Other income, net
 %
 
 %
Income before income taxes
6
 %
 
11
 %
Income tax expense
3
 %
 
5
 %
Net income
4
 %
 
7
 %
Net Sales
 
Thirteen Weeks Ended
 
October 27, 2012
 
October 29, 2011
Net sales (in thousands)
$
468,527

 
$
486,784

Comparable sales percentage (decrease) increase
(5
)%
 
5
%
Gross square footage at end of period (in thousands)
5,351

 
5,257

Number of:
 
 
 
Stores open at beginning of period
611

 
599

New stores
8

 
8

Closed stores
(1
)
 

Stores open at end of period
618

 
607



Net sales decreased by approximately $18.3 million, or 4%, from $486.8 million in the third quarter of 2011 to $468.5 million in the third quarter of 2012. Comparable sales decreased by $24.6 million, or 5%, in the third quarter of 2012 compared to the third quarter of 2011. The comparable sales decrease was driven by decreases in both transactions and average dollar sales, partially offset by growth in e-commerce sales. We attribute the decrease in transactions to lower traffic in our stores and a lesser acceptance of product in certain women's categories. Non-comparable sales increased $5.3 million, primarily driven by new store openings.
Gross Profit
The following table shows cost of sales and gross profit in dollars for the stated periods:
 
Thirteen Weeks Ended
 
October 27, 2012

October 29, 2011
 
(in thousands)
Cost of goods sold, buying and occupancy costs
$
316,989

 
$
310,816

Gross profit
$
151,538

 
$
175,968

The 390 basis point decrease in gross margin, or gross profit as a percentage of net sales, in the third quarter of 2012 compared to the third quarter of 2011 was comprised of a 240 basis point increase in buying and occupancy costs and a 150 basis point deterioration in merchandise margin. The increase in buying and occupancy costs is primarily driven by increased rent, including the impact of pre-opening rent for the 2 flagship stores. The decrease in merchandise margin was primarily driven by increased promotional activity during the quarter.

24

Table of Contents

Selling, General, and Administrative Expenses
The following table shows selling, general, and administrative expenses in dollars for the stated periods:
 
Thirteen Weeks Ended
 
October 27, 2012

October 29, 2011
 
(in thousands)
Selling, general, and administrative expenses
$
117,722

 
$
115,061


The $2.7 million increase in selling, general, and administrative expenses in the third quarter of 2012 compared to the third quarter of 2011 was driven by a $3.7 million increase in marketing expense, primarily related to a shift in timing for direct mail campaigns and a $1.3 million increase in information technology expenses to support international expansion and e-commerce growth, partially offset by a decrease in incentive compensation expense.
Interest Expense
The following table shows interest expense in dollars for the stated periods:
 
Thirteen Weeks Ended
 
October 27, 2012

October 29, 2011
 
(in thousands)
Interest expense
$
4,782

 
$
6,328


The $1.5 million decrease in interest expense in the third quarter of 2012 compared to the third quarter of 2011 resulted primarily from a lower debt balance primarily due to the $119.7 million prepayment of the Term Loan in the fourth quarter of 2011.
Income Tax Expense

The following table shows income tax expense in dollars for the stated periods:
 
Thirteen Weeks Ended
 
October 27, 2012
 
October 29, 2011
 
(in thousands)
Income tax expense
$
12,314

 
$
22,025


The effective tax rate was 41.4% for the third quarter of 2012 compared to 40.3% for the third quarter of 2011.
Results of Operations
The Thirty-Nine Weeks Ended October 27, 2012 Compared to the Thirty-Nine Weeks Ended October 29, 2011
The table below sets forth the various line items in the unaudited Consolidated Statements of Income and Comprehensive Income as a percentage of net sales for the thirty-nine weeks ended October 27, 2012 and the thirty-nine weeks ended October 29, 2011. Due to seasonal variations in the retail industry, the results of operations for any current period are not necessarily indicative of results expected for the full year or of future financial results. The seasonality of our operations may also lead to significant fluctuations in certain asset and liability accounts.

25

Table of Contents

 
Percentage of Net Sales
 
Thirty-Nine Weeks Ended
 
October 27, 2012
 
October 29, 2011
Net sales
100
 %
 
100
 %
Cost of goods sold, buying and occupancy costs
66
 %
 
64
 %
Gross profit
34
 %
 
36
 %
Selling, general, and administrative expenses
24
 %
 
24
 %
Other operating income, net
 %
 
 %
Operating income
10
 %
 
12
 %
Interest expense
1
 %
 
2
 %
Interest income
 %
 
 %
Other income, net
 %
 
 %
Income before income taxes
9
 %
 
10
 %
Income tax expense
4
 %
 
4
 %
Net income
5
 %
 
6
 %
Net Sales
 
Thirty-Nine Weeks Ended
 
October 27, 2012
 
October 29, 2011
Net sales (in thousands)
$
1,419,358

 
$
1,400,202

Comparable sales percentage increase
%
 
6
%
Gross square footage at end of period (in thousands)
5,351

 
5,257

Number of:
 
 
 
Stores open at beginning of period
609

 
591

New stores
20

 
21

Closed stores
(11
)
 
(5
)
Stores open at end of period
618

 
607



Net sales increased by $19.2 million, or 1%, from $1.4 billion in the thirty-nine weeks ended October 29, 2011 to $1.4 billion in the thirty-nine weeks ended October 27, 2012. Comparable sales were flat for the thirty-nine weeks ended October 27, 2012 compared to the thirty-nine weeks ended October 29, 2011. The flat comparable sales results were driven by decreases in both transactions and average dollar sales, partially offset by growth in e-commerce sales. We attribute the decrease in transactions to lower traffic in our stores and a lesser acceptance of product in certain women's categories. Non-comparable sales increased $22.1 million, primarily driven by new store openings.
Gross Profit
The following table shows cost of sales and gross profit in dollars for the stated periods:
 
Thirty-Nine Weeks Ended
 
October 27, 2012
 
October 29, 2011
 
(in thousands)
Cost of goods sold, buying and occupancy costs
$
932,532

 
$
896,088

Gross profit
$
486,826

 
$
504,114

The 170 basis point decrease in gross margin, or gross profit as a percentage of net sales, in the thirty-nine weeks ended October 27, 2012 compared to the thirty-nine weeks ended October 29, 2011 was comprised of a 110 basis point deterioration in merchandise margin and a 60 basis point increase in buying and occupancy costs. The decrease in merchandise margin was primarily driven by higher product costs and increased promotional activity in the latter part of the second quarter and into the

26

Table of Contents

third quarter. The increase in buying and occupancy costs is primarily driven by increased rent, including the impact of pre-opening rent for the 2 flagship stores.
Selling, General, and Administrative Expenses
The following table shows selling, general, and administrative expenses in dollars for the stated periods:
 
Thirty-Nine Weeks Ended
 
October 27, 2012
 
October 29, 2011
 
(in thousands)
Selling, general, and administrative expenses
$
347,224

 
$
342,236


The $5.0 million increase in selling, general, and administrative expenses in the thirty-nine weeks ended October 27, 2012 compared to the thirty-nine weeks ended October 29, 2011 was driven by a $3.6 million increase in information technology expenses to support international expansion and e-commerce growth and a $2.6 million increase in marketing expense, primarily related to a shift in timing for direct mail campaigns, partially offset by a decrease in incentive compensation expense.
Interest Expense
The following table shows interest expense in dollars for the stated periods:
 
Thirty-Nine Weeks Ended
 
October 27, 2012
 
October 29, 2011
 
(in thousands)
Interest expense
$
14,338

 
$
27,843


The $13.5 million decrease in interest expense for the thirty-nine weeks ended October 27, 2012 compared to the thirty-nine weeks ended October 29, 2011 resulted primarily from a $7.2 million loss on extinguishment related to the repurchases of $49.2 million of Senior Notes in the first and second quarters of 2011 and the amendment of the $200 million Revolving Credit Facility in the second quarter of 2011. The remaining reduction in expense relates to a lower debt balance in 2012 compared to 2011 due to the $119.7 million prepayment of the Term Loan in the fourth quarter of 2011.
Income Tax Expense

The following table shows income tax expense in dollars for the stated periods:
 
Thirty-Nine Weeks Ended
 
October 27, 2012
 
October 29, 2011
 
(in thousands)
Income tax expense
$
50,598

 
$
54,053


The effective tax rate was 40.2% for both the thirty-nine weeks ended October 27, 2012 and the thirty-nine weeks ended October 29, 2011.
On a full year basis, we anticipate our effective tax rate will be between 39.9% and 40.2%.  The rate is sensitive to the domestic/international profit mix since we recorded a valuation allowance against deferred tax assets arising from the net operating loss of foreign subsidiaries. 

Adjusted Net Income

The following table presents Adjusted Net Income and Adjusted Earnings Per Diluted Share for the stated periods:


27

Table of Contents

 
Thirty-Nine Weeks Ended
 
October 27, 2012
 
October 29, 2011
 
(in thousands)
Adjusted Net Income
$
75,324

*
$
84,997

Adjusted Earnings Per Diluted Share
$
0.86

*
$
0.96


* No adjustments were made to net income or earnings per diluted shares for the thirty-nine weeks ended October 27, 2012.    

We supplement the reporting of our financial information determined under GAAP with certain non-GAAP financial measures: adjusted net income and adjusted earnings per diluted share. We believe that these non-GAAP measures provide meaningful information to assist the readers of our financial information in understanding our financial results and assessing our prospects for future performance. Management believes adjusted net income and adjusted earnings per diluted share are important indicators of our operations because they exclude items that may not be indicative of, or are unrelated to, our core operating results, and provide a better baseline for analyzing trends in our underlying business. Because non-GAAP financial measures are not standardized, it may not be possible to compare these financial measures with other companies' non-GAAP financial measures having the same or similar names. These adjusted financial measures should not be considered in isolation or as a substitute for reported net income and reported earnings per diluted share. These non-GAAP financial measures reflect an additional way of viewing our operations that, when viewed with our GAAP results and the below reconciliations to the most directly comparable GAAP financial measures, provide a more complete understanding of our business. We strongly encourage investors and stockholders to review our financial statements and publicly-filed reports in their entirety and not rely on any single financial measure.

The table below reconciles the non-GAAP financial measures, adjusted net income and adjusted earnings per diluted share, with the most directly comparable GAAP financial measures, net income and earnings per diluted share. No adjustments were made to net income or earnings per diluted share for the thirty-nine weeks ended October 27, 2012, and therefore no tabular reconciliation has been included for the respective period.

 
Thirty-Nine Weeks Ended October 29, 2011
(in thousands, except per share amounts)
Net Income
 
Earnings per Diluted Share
 
Weighted Average Diluted Shares Outstanding
Reported GAAP Measure
$
80,303

 
$
0.90

 
88,838

Transaction Costs (a)*
348

 
0.01

 
 
Interest Expense (b)*
4,346

 
0.04

 
 
Adjusted Non-GAAP Measure
$
84,997

 
$
0.96

 
 

(a)
Includes transaction costs related to the secondary offering completed in April 2011.
(b)
Includes premium paid and accelerated amortization of debt issuance costs and debt discount related to the repurchases of $49.2 million of Senior Notes and the amendment of the $200 million Revolving Credit Facility.

* Items were tax affected at our statutory rate of approximately 39% for the thirty-nine weeks ended October 29, 2011.

Liquidity and Capital Resources
General

Our business relies on cash flows from operations as our primary source of liquidity. We do, however, have access to additional liquidity, if needed, through borrowings under our Revolving Credit Facility. Our primary cash needs are for merchandise inventories, payroll, store rent, and capital expenditures (primarily associated with opening new stores, updating existing stores, and information technology projects). The most significant components of our working capital are merchandise inventories, accounts payable, and other accrued expenses. Our liquidity position benefits from the fact that we generally collect cash from sales to customers the same day or, in the case of credit or debit card transactions, within 3 to 5 days of the related sale, and have up to 75 days to pay certain merchandise vendors and 45 days to pay the majority of our non-merchandise vendors.


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Our cash position is seasonal as a result of building up inventory for the next selling season and, as a result, our cash flows from operations during the spring are usually lower when compared to the rest of the year. Our cash balances generally increase during the summer selling season and then increase further during the fall and holiday seasons. We believe that cash generated from operations and the availability of borrowings under our Revolving Credit Facility or other financing arrangements will be sufficient to meet working capital requirements, anticipated capital expenditures, and scheduled interest payments for at least the next 12 months.
Cash Flow Analysis
A summary of operating, investing and financing activities are shown in the following table:
 
 
Thirty-Nine Weeks Ended
October 27, 2012
 
October 29, 2011
 
(in thousands)
Provided by operating activities
$
89,142

 
$
64,343

Used in investing activities
(73,564
)
 
(55,975
)
Used in financing activities
(65,543
)
 
(51,148
)
Decrease in cash and cash equivalents
(49,924
)
 
(42,780
)
Cash and cash equivalents at end of period
$
102,438

 
$
144,982

Net Cash Provided by Operating Activities
The majority of our operating cash inflows are derived from sales. Our operating cash outflows generally consist of payments to merchandise vendors, employees for wages, salaries, and other employee benefits, and landlords for rent. Operating cash outflows also include payments for income taxes and interest on long-term debt. Net cash provided by operating activities was $89.1 million for the thirty-nine weeks ended October 27, 2012 compared to $64.3 million for the thirty-nine weeks ended October 29, 2011, an increase of $24.8 million. Relative to the thirty-nine weeks ended October 27, 2012, the increase in cash provided by operations primarily related to the following:

Items included in net income provided $141.6 million of cash during the thirty-nine weeks ended October 27, 2012 compared to $139.0 million during the thirty-nine weeks ended October 29, 2011. The increase in the current year was primarily driven by lower interest expense, partially offset by the decreased performance of the business.

In addition to the increase in cash provided by items included in net income discussed above, there was $52.5 million of cash used for working capital increases during the thirty-nine weeks ended October 27, 2012 compared to $74.7 million of cash used for the thirty-nine weeks ended October 29, 2011. Working capital is subject to cyclical operating needs, the timing of receivable collections and payable and expense payments, and the seasonal fluctuations in our operations. The $22.2 million change primarily relates to lower cash outflows for inventory purchases during the thirty-nine weeks ended October 27, 2012 compared to the same period last year.
 Net Cash Used in Investing Activities
Investing activities consist primarily of capital expenditures for new and remodeled store construction and fixtures, information technology, and home office renovations.

Net cash used in investing activities totaled $73.6 million for the thirty-nine weeks ended October 27, 2012 compared to $56.0 million for the thirty-nine weeks ended October 29, 2011, a $17.6 million increase. This increase was primarily driven by capital expenditures, gross of landlord allowances, attributable to new store openings and remodels, totaling $58.4 million during the thirty-nine weeks ended October 27, 2012 compared to $50.3 million during the thirty-nine weeks ended October 29, 2011. The remaining increase related primarily to investments in technology to support our growth pillars.

For the remainder of 2012, we plan to open approximately 8 new stores, including 5 in the United States and 3 in Canada. We expect capital expenditures for the remainder of 2012 to be approximately $22.0 million to $27.0 million, primarily driven by these new store openings. These capital expenditures do not include the impact of landlord allowances, which are expected to be approximately $2.0 to $4.0 million for the remainder of 2012, or approximately $16.0 million to $18.0 million for the full year 2012.


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Net Cash Used in Financing Activities
Net cash used in financing activities totaled $65.5 million during the thirty-nine weeks ended October 27, 2012 as compared to $51.1 million for the thirty-nine weeks ended October 29, 2011, an increase of $14.4 million. Cash used for financing activities was primarily used for the repurchase of $65.1 million of our common stock during the thirty-nine weeks ended October 27, 2012 as part of our Repurchase Program. The cash used in financing activities for the thirty-nine weeks ended October 29, 2011 was related primarily to the repurchase of Senior Notes.
Credit Facilities

The following provides an overview of the current status of our long term debt arrangements.  Refer to Note 10 of our unaudited Consolidated Financial Statements for additional information related to our long-term debt arrangements.

Revolving Credit Facility
On July 29, 2011, Express Holding and its domestic subsidiaries entered into an amended and restated $200.0 million secured asset-based loan credit agreement. The Revolving Credit Facility amended, restated, and extended the existing $200.0 million asset-based revolving credit facility, which was scheduled to expire on July 6, 2012. The amended Revolving Credit Facility is scheduled to expire on July 29, 2016 and allows for up to $30.0 million of swing line advances and up to $45.0 million to be available in the form of letters of credit.
As of October 27, 2012, there were no borrowings outstanding under the Revolving Credit Facility, and we had $197.9 million of availability. We were not subject to the fixed charge coverage ratio covenant in the Revolving Credit Facility at October 27, 2012 because excess availability plus eligible cash collateral exceeded 10% of the borrowing base.
Senior Notes
On March 5, 2010, Express, LLC and Express Finance, as co-issuers, issued $250.0 million of 8 3/4% Senior Notes due 2018 at an offering price of 98.6% of the face value. Interest on the Senior Notes is payable on March 1 and September 1 of each year. Unamortized debt issuance costs outstanding related to the Senior Notes as of October 27, 2012 were $6.4 million.

In the first quarter of 2011, $25.0 million of Senior Notes were repurchased on the open market at a price of 108.75% of the principal amount. In the second quarter of 2011, $24.2 million of Senior Notes were repurchased on the open market at an average price of 109.21% of the principal amount.
Contractual Obligations

We entered into lease and property related commitments totaling approximately $441.7 million over their respective lease and other obligation terms during the thirty-nine weeks ended October 27, 2012. There have been no other significant changes to our contractual obligations between January 28, 2012 and October 27, 2012. For additional information regarding our contractual obligations as of January 28, 2012, see "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report for the fiscal year ended January 28, 2012.
Seasonality
Our business is seasonal and, historically, we have realized a higher portion of our net sales and net income in the third and fourth quarters due primarily to early fall selling patterns as well as the impact of the holiday season. Generally, the annual sales split is approximately 45% for the spring season (first and second quarters) and 55% for the fall season (third and fourth quarters). Normal cash requirements are typically higher in the first and third quarters due to inventory-related working capital requirements for early fall and holiday selling periods. Our business is also subject, at certain times, to calendar shifts, which may occur during key selling periods close to holidays such as Easter, Thanksgiving, and Christmas, and regional fluctuations for events such as sales tax holidays.
Critical Accounting Policies
Management has determined that our most critical accounting policies are those related to revenue recognition, merchandise inventory valuation, long-lived assets valuation, claims and contingencies, income taxes, and share-based payments. We continue to monitor our accounting policies to ensure proper application of current rules and regulations. There have been no significant changes to the policies discussed in our Annual Report for the year-ended January 28, 2012.



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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk
Our Revolving Credit Facility bears interest at variable rates. We did not borrow any amounts under the Revolving Credit Facility during the thirty-nine weeks ended October 27, 2012. Borrowings under our Senior Notes bear interest at a fixed rate. For fixed rate debt, interest rate changes affect the fair value of such debt, but do not impact earnings or cash flow. Changes in interest rates are not expected to have a material impact on our future earnings or cash flows given our limited exposure to such changes.

Foreign Currency Exchange Risk
All of our purchases are denominated in U.S. dollars, therefore we are not exposed to foreign currency exchange risk on these purchases. However, we currently operate 8 stores in Canada. The functional currency of our Canadian operations is the Canadian dollar. Our Canadian operations have intercompany accounts with our U.S. subsidiaries that eliminate upon consolidation, but the transactions resulting in such accounts do expose us to foreign currency exchange risk. As of October 27, 2012, we did not utilize hedging instruments to mitigate foreign currency exchange risks. A hypothetical 10% change in the Canadian foreign exchange rate would not materially affect our results of operations or cash flows.
 
ITEM 4. CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e) promulgated under the Exchange Act of 1934 ("Exchange Act") that are designed to provide reasonable assurance that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the SEC's rules and forms and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable, and not absolute, assurance of achieving the desired control objectives. In reaching a reasonable level of assurance, management necessarily was required to apply its judgment in evaluating the cost benefit relationship of possible controls and procedures.

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation prior to filing this report of our disclosure controls and procedures. Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of October 27, 2012.

Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the third quarter of 2012 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1.
LEGAL PROCEEDINGS.
Information relating to legal proceedings is set forth in Note 12 to our unaudited Consolidated Financial Statements included in Part I of this Quarterly Report and is incorporated herein by reference.
 
ITEM 1A.
RISK FACTORS.
Our risk factors as of October 27, 2012 have not changed materially from those disclosed in our Annual Report filed with the SEC on March 23, 2012. The risk factors disclosed in our Annual Report, in addition to the other information set forth in this Quarterly Report, could materially affect our business, financial condition or results.




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ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
The following table provides information regarding the purchase of shares of our common stock made by or on behalf of the Company or any "affiliated purchaser" as defined in Rule 10b-18(a)(3) under the Exchange Act of 1934, during each month of the quarterly period ended October 27, 2012:
Month
 
Total Number of Shares Purchased (1)
 
Average Price Paid per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2)
 
Approximate Dollar Value of Shares that May Yet be Purchased under the Plans or Programs (2)
 
 
 
 
 
 
 
 
(in thousands)
July 29, 2012 - August 25, 2012
 
191

 
$
15.49

 

 
$
50,000

August 26, 2012 - September 29, 2012
 
902

 
$
15.82

 

 
$
50,000

September 30, 2012 - October 27, 2012
 
1,283,901

 
$
11.70

 
1,282,206

 
$
35,038

Total
 
1,284,994

 
 
 
1,282,206

 
 
(1) Represents shares of restricted stock purchased in connection with employee tax withholding obligations under the 2010 Plan, which are not purchases made under the Company's publicly announced program.
(2) On May 24, 2012, the Board authorized the repurchase of up to $100 million of the Company's common stock, which may be made from time to time in open market or privately negotiated transactions. The 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.

ITEM 3.
DEFAULTS UPON SENIOR SECURITIES.
Not applicable.

ITEM 4.
MINE SAFETY DISCLOSURES.

Not applicable.

ITEM 5.
OTHER INFORMATION.

None.

ITEM 6. EXHIBITS.

Exhibits. The following exhibits are filed or furnished with this Quarterly Report:
Exhibit
Number
Exhibit Description
31.1
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
Certification of Principal Financial Officer and Principal Executive Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS
XBRL Instance Document. *
101.SCH
XBRL Taxonomy Extension Schema Document.*
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document.*
101.LAB
XBRL Taxonomy Extension Label Linkbase Document. *
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document. *
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document. *

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* Pursuant to Regulation S-T, this interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections.

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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
Date:
December 5, 2012
EXPRESS, INC.
 
 
 
 
 
 
By:
/s/ D. Paul Dascoli
 
 
 
D. Paul Dascoli

 
 
 
Senior Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer)


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