Express, Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the Express, Inc. Q4 2020 earnings call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone keypad. If you require further assistance, please press star 0. It is now my pleasure to turn the call over to your speaker today, Mr. Dan Aldridge, VP, Investor Relations. Please go ahead.

Thank you, and good morning, and welcome to our call. I'd like to open by reminding you of the company's safe harbor provisions. Any statements made during this conference call, except those containing historical facts, may be deemed to constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual future results may differ materially from those suggested in forward-looking statements due to a number of risks and uncertainties, all of which are described in the company's filings with the SEC, including today's press release. Express assumes no obligation to update any forward-looking statements or information except as required by law. Our comments today will supplement the detailed information provided in both the press release and the investor presentation available on the company's investor relations website. In addition, you can locate a reconciliation of any adjusted results discussed in our comments to amounts reported under GAAP on our website or in our earnings release. With me today are Tim Baxter, Chief Executive Officer, Perry Pericleas, Chief Financial Officer, and Matt Mullering, President and Chief Operating Officer. I will now turn the call over to Tim.

Thank you, Dan, and good morning, everyone. In the fourth quarter and throughout 2020, we have successfully advanced the Expressway Forward strategy and taken decisive, appropriate actions to effectively manage our liquidity. We intensified our focus on e-commerce demand, and traffic, transactions, and conversion have all increased. We shifted gears on product, driving down high penetrations and occasion-based categories and driving up the percentage of more versatile ones, and they outpaced our overall performance. We completed the first phase of our loyalty program relaunch and added 8% more new members than last year, who we expect will generate meaningful incremental value because they generally spend at two times the rate of non-members. We reallocated our marketing dollars to drive greater brand awareness and saw a 54% increase in engagement across our paid social channels. We responded to significant declines in mall traffic by sharpening our focus on conversion, and saw increases across all of our channels. We reduced $250 million in costs through expense reductions, capital reductions, and inventory cuts. We secured $140 million in additional financing, and we negotiated $85 million in savings through rent abatements, deferrals, and reductions. Our strategy is the right one. and we will continue to advance its four foundational pillars while being agile in response to the accelerated pace of consumer and marketplace change. Our fourth quarter results do not reflect where our business is headed. Store traffic continues to be materially affected by the pandemic. However, our comp sales did improve sequentially from the third quarter to the fourth quarter. Our gross margin improved significantly from the third quarter, and I expect these trends to continue in the first quarter and throughout 2021. We also saw encouraging trends in the Southeast, where coronavirus guidelines were less restrictive. Comps were on average 20 points better than in the more restrictive Northeast and California markets. Controlling the controllables was absolutely essential in 2020, and we are back on the expressway, advancing our transformation in 2021. I expect that sales and gross margins will continue to improve throughout the year. and that we will achieve positive EBITDA in the back half of the year and positive operating cash flow for the full year. In 2020, we began transforming from a mall-based specialty retailer to a modern, relevant, and compelling multi-channel brand. And now, we are well positioned for the post-pandemic world. Our product strategy was already focused on versatility and comfort. We were already bringing newness and innovation to our where to work and occasion product. We were already leveraging the authenticity and input of our influencer and customer communities to bring a new dimension to our brand message. And we were already investing more to accelerate our digital business. Let me share the progress we have made in each of our channels, starting with the biggest one, which is e-commerce. All of you and all of our customers have known Express as a store in the mall. And at the top of 2020, most people still met our brand that way. But we knew that meaningful digital advancement needed to be a part of our strategy. We will drive increases in traffic, conversion, and average order value by continuing to invest in our omnichannel capabilities. We have built a plan to grow our digital channel to deliver $1 billion in demand in 2024. The plan is based on our four foundational pillars of product, brand, customer, and execution. Moving forward, we will optimize our product assortment through product extensions and expansions and robust growth of our marketplace business with the addition of new categories such as active, swimwear, and intimates. We will foster brand preference, loyalty, and advocacy through greater personalization such as real-time product recommendations and a new buildable wardrobe feature. We will drive customer acquisition and retention through enhanced service offerings, such as our digital stylist program. We will enhance and streamline the checkout process, improve search and navigation functionality, and apply features we launched with our SiteGree platform to our mobile app experience. We will generate sales through our social media channels and take our customer co-creation to the next level by building a more expansive and involved express community where all who participate have the opportunity to create confidence and inspire self-expression. With strong digital and multi-channel thinking already a part of our future strategy, we brought forward into 2020 many of the enhancements that we had planned for further down the road. because the pandemic made driving greater conversion online mission critical. We accelerated and enhanced buy online pickup in store, ship from store, curbside pickup, product detail pages, and user-generated content, all of which resulted in consistent increases in digital traffic, transactions, and conversion. To provide order of magnitude perspective, digital sales now represent over 50% of our total retail business. However, revenue did not keep pace with transactions as customers shifted to categories that drove lower average order values. Influencer-driven traffic to our digital properties is up 3%, and demand driven through our website is up 34%. Engagement across our paid social channels is up 54%, with a 130% increase in traffic and a 150% increase in demand. We leverage learning from our digital startup, UpWest, and the day-to-day knowledge from patterns emerging on Express.com. Customer feedback and sales results continue to inform our thought process and certainly validate the importance of a fulsome, multi-channel approach to effectively reach customers when, where, and how they want to shop. Although UpWest is not yet material to our overall results, the brand has resonated and the business has performed ahead of our expectations. In fact, UpWest has outperformed a number of other digitally native brands on a first year revenue basis, including brands that have gone on to have extremely high valuations. UpWest launched at the end of 2019 as a direct consumer brand with product and purpose focused on comfort and managed as a completely separate entity from Express, led by fully dedicated design merchandising, and marketing teams. UpWest.com experienced strong traffic and increases in conversion throughout the first year. Its customer database and social media following are growing nicely, as is the customer's response to the brand's sustainability message. We have seen good success with UpWest pop-ups, as well as the offering within multi-brand retailer neighborhood goods in Manhattan and Austin. We plan to open additional pop-ups in 2021 which will continue building brand awareness and driving customer acquisition. Up West is a catalyst for growth that I expect will deliver long-term shareholder value for Express. Turning to our second channel, our retail stores. The strength in our online business was not enough to offset the declines in our physical stores, which of course continued to be impacted by significantly reduced ball traffic. As I said, this channel is still where most people meet our brand. And in fact, the majority of our customer acquisition still comes through this channel. So physical stores will continue to be an important part of the Expressway Forward strategy. And having already announced our fleet rationalization plan to close 100 stores, our focus has now shifted to fleet optimization. Fleet rationalization is about the number of stores. fleet optimization is about the store location, size, concept, format, and most importantly, the role physical stores will play in customers' post-pandemic lives. Our mall-based stores can be more productive, and we must also expand beyond the mall. We introduced a reduced square footage concept at the King of Prussia Mall, decreasing the amount of space by 45%, and the results are outstanding. with productivity double that of the balance of our fleet. This has been and will continue to be an important testing ground for us to determine the optimal size of our mall-based stores. And we will be able to act on that learning because we have tremendous flexibility with approximately two-thirds of our leases actionable over the next three years. We also see an opportunity to diversify our fleet, which is today predominantly mall-based. So we opened two express edit concept stores, one in Columbus and another in Nashville. These are street locations with strong foot traffic. These stores have a smaller footprint at 1,400 to 4,000 square feet and a product mix curated to reflect local styles and trends within a particular market and even neighborhood. We have already seen a higher penetration of new and reactivated customers with 45% new customers in the Nashville location. and over 20% reactivated customers in both stores. We plan to add eight more Express Edit concept stores in 2021, which are short-term leases to allow us maximum flexibility as we learn about this new format. Our outlet channel outperformed our retail stores in the fourth quarter and the full year. And that was before the product reflected the Express Edit design philosophy. Because our outlet customer is just as focused on fashion as our retail customer, we have begun to apply this approach to this assortment and are bringing styles from retail to outlet much more quickly, which is already generating strong response. E-commerce, optimized retail, outlet. A solid, sustainable retail strategy must be holistic and therefore must include a value component. So as we continue to move away from deep site-wide and store-wide promotions, because it is the right thing to do for our brand, we will ensure that our outlet assortments are fully reflective of the express edit approach to put our best foot forward in this important value channel. Across each of our four foundational pillars, product, brand, customer, and execution, we have made significant progress. Let me take you through what we've done, the results we've achieved to date, and what is still to come across each one. I'll start with product. Versatility adds value is one of the core ideas within the Express Edit design philosophy. We have been known primarily for where to work and occasion-based categories, where we have held strong market share positions. Today, we are seeing tremendous strength in our most versatile product categories, especially what is quickly becoming our new core, which is Denim Bottoms and Express Essential Tops. In denim, we saw continued strength in our newest fabric platforms. Luxe Comfort Knit and Temp Control Hyper Stretch rolled out in the third quarter. Super Soft and 4-Way Hyper Stretch launched in the fourth quarter, and these drove 25% of our denim business. In total denim, we sold over 1.6 million units. For spring, in women's, we will launch more leg shapes. And for summer, we will have ankle length cropped and an entirely new assortment of shorts. We will also have a new curvy fit that was developed through a dialogue between our designers and our customers. Optimizing denim inventory is also essential to our success, and we have identified key fits, washes, and sizes that are the core of our business and have committed to being in stock, online, and in stores. Denim was also a key driver of new customer acquisition. We signed up more than 240,000 new Denim customers in the fourth quarter and have since added more than 40,000 in February. Going forward, Denim will play an outsized role in expanding our customer base. Today, one in four of our customers buy Denim, which is a record high for us in terms of customer penetration. and our denim customer is among our most valuable, spending generally three times more with a 22% higher spend per transaction compared to a non-denim customer. As we move forward, I expect this category to significantly accelerate for both women and men. Express Essentials, our new foundational knit tops for women and men, are represented across all of our channels. These styles performed exceptionally well in the fourth quarter, selling over 500,000 units. This product is modern, relevant, and versatile, and meets weekday and weekend wardrobe needs. Express Essentials will be our new core, but never basic, because we know that people come to Express for elevated fashion details. In women's, Express Essentials are offered across four fit platforms, body contour, which slims and shakes her silhouette, fitted, skimming, and relaxed. In the fourth quarter, we sold over 400,000 units, and we launched Body Contour in February, selling over 40,000 units. In men's, Express Essentials include polos, Henleys, and tees, in elevated fabrics, great colors, and with those fashion details our customer appreciates. Polos, the most versatile men's shirt, were up 6% to last year, and up 61% online in the fourth quarter. Men's graphic tees were also up 6% to last year and up 120% online, driven by continued success of the X logo program we introduced last year. Going forward, we see significant upside in our Express Essentials knit business and plan to deliver over $125 million in sales this year, which speaks to the relevance and appeal of this offering. Our product strategy is working. And as we grow these programs in 2021, we will continue to dimensionalize versatility and comfort in our assortments. We are also very well positioned to meet the wardrobe needs of people returning to offices, social gatherings, and occasions of all kinds because of our strength in where to work and dress apparel. We will seize every opportunity to regain market leadership in these categories where we have historical strength and develop new market leadership in denim and knits. Our second foundational pillar is brand. We introduced a new brand purpose to create confidence and inspire self-expression and a new brand promise to edit the best of now for real life versatility. Today, we fulfill our purpose and promise through social engagement, influencer relationships, and customer co-creation. and with a wide variety of initiatives and activations that create deeper, more meaningful connections with our most loyal and our newest Express fans. Our goal is for Express customers to see themselves as a part of a styling community, to feel connected to our brand, our physical and digital stores, our sales associates, and we will fuel those connections through a shared appreciation for the inspiration and power of fashion and a shared belief that clothes can serve a higher purpose. This work is already in progress and we're seeing great results with increases in engagement and conversion across all of our channels. In fact, we just learned last week that we were named one of the Influencer Marketers of the Year by RewardStyle for outstanding influencer marketing strategy, the criteria being engagement, brand sentiment, and ROI. The Express Digital Stylist program is exceeding our expectations, showing a 52% conversion for those who interact with a stylist, and we still have tremendous opportunity with this program. Restoring the relevance of the Express brand is a key priority, and as evidenced by brand tracking measures, social media engagement, and customer feedback, we've made good progress in a relatively short period of time. In 2020, we laid the foundation for this transformation, And in 2021, we will build on this momentum. We will evolve our customer experience model in our physical and digital stores, expand and enhance our styling capabilities, and offer more localized assortments and more personalized selling. Customer. We remain focused on engaging existing customers and acquiring new ones. So in 2020, We refined our approach to identifying and connecting with customers, sharpened our digital spend, and drove greater personalization of messages through owned and paid media channels. The Express Insider Loyalty Program is one of the most impactful ways we acquire and engage customers. So we developed a more compelling customer value proposition and enhanced and rebranded the experience. This led to a fourth quarter increase in loyalty sign-ups of 8% over the prior year, despite significantly reduced store traffic. We have also seen a 3% higher spend per new customer versus last year, driven by a 4% increase in visits and a 3% increase in units per transaction, despite the decline in sales of hire, ticket, where to work, and occasion-based product. Our Express Insider members have tremendous lifetime value. They spend on average two times more than non-members annually, their retention rate is seven times greater, and new members are nearly two times more likely to make a second visit within the first 90 days. In a few weeks, we will enter the next phase of our relaunch, which includes new participation tiers, new benefits, a digital wallet feature, and an easier way for customers to earn, track, and redeem their benefits. And we will also reissue the express private label credit card, which should drive incremental sales through additional trips and improved retention. Over the last year, we have not only increased our engagement with customers, but we have done so in new and creative ways. We began a dialogue with our top loyalty members to understand their wardrobe needs and style preferences, which led to our first ever express designer and express customer co-created product capsule in the fourth quarter. our Live in Luxe holiday assortment. This was one of our fastest-selling collections for the quarter, moving over 230,000 units and attracting over 50,000 new customers. Our second customer co-creation focused on men's and women's denim. It was launched in February, and we've seen great success, selling over 40,000 units in February alone. And our final pillar, execution. which is both a through line across product, brand, and customer, and the evolution of our operating model as a result of more streamlined and disciplined systems and processes. Conversion is a key component of execution, and we have successfully driven increases across all of our channels. In stores, this was driven by a new customer experience model, new associate training programs, and a continued focus on loyalty signups. Higher conversion will also help us improve our inventory position, which is up 20% versus last year's levels, but is down 1% compared to 2018. And while the level is higher than we planned, a large portion of this inventory is in core, seasonless product with low markdown risk. And we are managing through the balance of the inventory appropriately and delivering significantly improved margins on our clearance. I expect our inventory will be more aligned with our sales trends as we move into the back half of the year and business continues to recover. One of the most important aspects of execution in 2020 was effectively managing our liquidity. We finalized discussions with nearly all of our landlords, negotiating a total of $85 million in abatements, deferrals, and future rent reductions. And we reduced expenses in the fourth quarter by $35 million. We then secured an additional $140 million in financing to support business continuity and allow us to emerge from the pandemic with the means to keep driving our strategy and accelerating our business. Product, brand, customer, and execution. Across each one of these pillars, we have focused on what we expect will drive long-term value for our company. And despite the many challenges of 2020, we have meaningfully advanced the Expressway Forward strategy. As we move through 2021, I expect revenue to improve as vaccines continue to roll out and as more people return to work in offices and resume social gatherings and occasions. I also expect that we will deliver positive EBITDA in the back half of the year and finish the year with positive operating cash flow. Perry will provide detail on our fourth quarter and full year results. give an update on our liquidity actions, and share our view for the balance of the year.