Is Express Inc (EXPR) Q4 2020 Earnings A Buy?

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Fashion apparel retailer Express, Inc. (NYSE: EXPR), announced its financial results for the fourth quarter and full year 2020. These results, which cover the thirteen and fifty-two weeks ended January 30, 2021, are compared to the thirteen and fifty-two weeks ended February 1, 2020.

“Over the past twelve months, we have effectively managed our liquidity while meaningfully advancing the EXPRESSway Forward strategy. We took appropriate action and made progress despite extraordinary circumstances and market conditions,” said Tim Baxter, Chief Executive Officer. “We are well positioned to accelerate in 2021. I expect sales to continue improving sequentially each quarter, and that we will return to positive EBITDA in the back half of the year.”

Fourth Quarter 2020 Operating Results:

  • Consolidated net sales decreased 29% to $430.3 million from $606.7 million in the fourth quarter of 2019, with consolidated comparable sales down 27%.
    • Comparable retail sales, which includes both Express stores and eCommerce, decreased 28% compared to the fourth quarter of 2019.
    • Comparable outlet sales decreased 27% versus the fourth quarter of 2019.
  • Gross margin was 16.6% of net sales compared to 27.0% in last year’s fourth quarter. The decrease was driven by the sales impact of COVID-19 and a $4.5 million non-cash impairment charge taken against certain long-lived store assets.
  • Selling, general, and administrative (SG&A) expenses were $134.0 million, 31.1% of net sales, versus $148.9 million, 24.5% of net sales, in last year’s fourth quarter. The decrease was driven primarily by the COVID-19 mitigation actions taken by the Company, a reduction in variable costs driven by the sales decline and the previously announced corporate restructuring.
  • Operating loss was $62.7 million compared to a loss of $189.9 million in the fourth quarter of 2019. The loss from the prior year includes approximately $205.0 million in intangible asset impairment and restructuring charges.
  • Income tax benefit was $10.8 million, at an effective tax rate of 16.9%, compared to income tax benefit of $47.5 million, at an effective tax rate of 25.1% in last year’s fourth quarter. The Company’s effective tax rate for the fourth quarter of 2020 was impacted primarily by the recording of a valuation allowance against the Company’s deferred tax assets.
  • Net loss was $53.3 million, or a loss of $0.82 per diluted share. On an adjusted basis, net loss was $43.1 million, or a loss of $0.66 per diluted share for the fourth quarter of 2020. The adjusted loss excludes the income tax benefit from the Coronavirus Aid Relief and Economic Security (CARES) Act of $5.5 million, as well as the negative non-cash impacts of the deferred tax asset valuation allowance of $12.4 million and the $4.5 million pretax impairment charge mentioned above. This compares to a net loss of $141.6 million, or a loss of $2.21 per diluted share, in the fourth quarter of 2019. On an adjusted basis, net income was $13.8 million, or $0.21 per diluted share, in the fourth quarter of 2019.
  • Earnings before interest, taxes, depreciation, and amortization (EBITDA) was a loss of $45.0 million compared to a loss of $168.7 million in the fourth quarter of 2019. EBITDA was negatively impacted by the asset impairment of $4.5 million in the fourth quarter of 2020 and the impairment of the intangible assets of $197.6 million and property, equipment, and lease assets of $2.1 million in the fourth quarter of 2019.

Full Year 2020 Operating Results:

  • Consolidated net sales decreased 40% to $1,208 million from $2,019 million in 2019, with consolidated comparable sales down 27%.
    • Comparable retail sales, which includes both Express stores and eCommerce, decreased 29% compared to 2019.
    • Comparable outlet sales decreased 21% versus 2019.
  • Operating loss was $455.2 million compared to a loss of $217.9 million in 2019. The loss from the prior year includes approximately $205.0 million in intangible asset impairment and restructuring charges.
  • Net loss was $405.4 million, or a loss of $6.27 per diluted share. On an adjusted basis, net loss was $314.3 million, or a loss of $4.86 per diluted share, in 2020. The adjusted loss excludes the income tax benefit from the CARES Act of $42.1 million, as well as the negative non-cash impacts of the $105.7 million deferred tax asset valuation allowance and the $34.4 million pretax impairment charge. This compares to a net loss of $164.4 million, or a loss of $2.49 per diluted share, in 2019. On an adjusted basis, net loss was $5.1 million, or a loss of $0.08 per diluted share, in 2019.
  • EBITDA was a loss of $384.7 million compared to a loss of $132.8 million in 2019. EBITDA was negatively impacted by the asset impairment of $34.4 million in 2020 and the impairment of the intangible assets of $197.6 million and property, equipment, and lease assets of $4.4 million in 2019.

Balance Sheet And Cash Flow Highlights:

  • Cash and cash equivalents totaled $55.9 million at the end of 2020 versus $207.1 million at the end of 2019; cash and cash equivalents at year-end were limited by the terms of our credit facilities.
  • Capital expenditures totaled $16.9 million for 2020 compared to $37.0 million for 2019.
  • Inventory was $264.4 million at the end of 2020, up 20.0% compared to $220.3 million at the end of 2019. The increase was primarily driven by continued pressure on sales from the pandemic and higher than planned inventory in core, seasonless product. In addition, the Company made the decision in late 2019 to liquidate underperforming product, which significantly decreased year-end 2019 inventory balance. Year-end 2020 inventory is down slightly when compared to year-end 2018 inventory balance.
  • Long-term debt was $192.0 million at the end of 2020.

Borrowings:

On January 14, 2021, the Company announced that it has entered into a definitive loan agreement with Sycamore Partners as lead lender, along with Wells Fargo and Bank of America Merrill Lynch, that strengthens its liquidity position by an additional $140.0 million. The new financing includes a $90.0 million FILO Term Loan with a maturity date of May 24, 2024, and a $50.0 million Delayed Draw Term Loan. This financing is in addition to the Company’s existing $250.0 million revolving credit facility, of which $106.1 million was borrowed at year-end.

As of January 30, 2021, the net amount outstanding under the Company’s credit facilities was $196.1 million and approximately $35.6 million was available for borrowing under the Company’s revolving credit facility after giving effect to certain borrowing base limitations and outstanding letters of credit in the amount of $36.1 million. Further details regarding the facility are available on the Current Report on Form 8-K filed by the Company with the SEC on January 14, 2021.

Real Estate Agreements:

The Company took a number of steps to improve liquidity during the COVID-19 pandemic, including negotiating $85 million in rent abatements, deferrals and future rent reductions. The breakdown is as follows:

  • $50 million in rent abatements
  • $25 million in future rent reductions and allowances
  • $10 million in rent deferrals

$25 million of the rent abatements were executed in 2020, and the remaining $25 million have been agreed to and are expected to be executed in the first quarter of 2021.

eCommerce Strategy:

The Company is finalizing a strategy that will grow its digital channel to $1.0 billion in 2024 and expects to unveil the details of the strategy in the second quarter of 2021. The strategy is based on the four foundational pillars of Product, Brand, Customer, and Execution, and will be driven by increases in conversion, average transaction value and traffic fueled by the following initiatives:

  • Assortment optimization through shared choices, product extensions and expansions, robust growth through their Marketplace business, and enhanced service offerings
  • Relaunch of the Express Insider loyalty program
  • Focus on selling through social media channels and influencer networks to create a true customer community
  • Enhancements to multi-channel capabilities to improve speed and service
  • Website enhancements; including faster checkout processes and improved search and navigation functionality

Full Year 2021 Outlook:

Due to the uncertainty of the current environment, the Company will only provide a high level outlook for 2021. For the full year of 2021, the Company expects the following:

  • Sequential comparable sales improvement throughout the year
  • Significant gross margin improvement for the year
  • Buying & Occupancy expense dollars to decrease double digits as a percent to 2019
  • SG&A expense dollars to decrease high single digits as a percent to 2019
  • Positive operating cash flow for the year
  • Positive EBITDA for the second half of the year
  • Capital expenditures of approximately $35 million

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