Express, Inc.

Good day and thank you for standing by. Welcome to the Express Inc. Q1 2021 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Dan Aldridge, Vice President of Investor Relations. Please go ahead.

Thank you, Mariana. 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 websites. 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. All commentary on year-over-year comparisons and our prepared remarks today refer to 2020, unless otherwise noted. With me today are Tim Baxter, Chief Executive Officer, Perry Pericleas, Chief Financial Officer, and Matt Mullering, President and Chief Operating Officer. I'll now turn the call over to Tim.

Thank you, Dan, and good morning, everyone. Our top and bottom line performance in the first quarter exceeded our expectations. Although February was tough, March and April were considerably better and we experienced a significant inflection point in the business at Easter. Our comp trends have further accelerated and our second quarter comp volumes to date are now exceeding 2019 levels. Our results are now beginning to reflect the power of our product, brand, and customer strategies. We have meaningfully advanced the expressway forward and made excellent progress on our transformation from a store in the mall to a modern, relevant, multi-channel band with a compelling purpose. And we are well positioned for the post-pandemic world. In the first quarter, we introduced a plan to drive a billion dollars in e-commerce demand by 2024. And our first quarter e-commerce results are a strong start towards achieving that goal. We drove a 40% increase in transactions a 19% increase in conversion, and an 18% increase in traffic, all of which contributed to an e-commerce comp of up over 40% in the first quarter. We continued to see strong momentum with our fashion deliveries, with sell-throughs up double digits compared to 2019. We established new core denim and express essentials, and both categories posted positive comps versus 2019, with denim up double digits in our retail channel. We pulled back on promotions in the first quarter based on positive customer response to our new product and will continue to be less promotional going forward. We delivered a nearly 1,100 basis point improvement in merchandise margin and expect to improve further as our inventory composition reflects a higher penetration of new receipts. We drove greater brand awareness through influencer activations and saw demand driven by these channels increase by 30%. We completed the relaunch of our loyalty program, added 162% more new members than last year and 7% more new members than in 2019. We kicked off a customer reactivation strategy in April that has already led to a 22% increase in returning lapsed customers. We maintained a sharp focus on conversion and saw increases in this important metric across all of our channels. We further bolstered our liquidity position and improved operating cash flow by $130 million. We delivered significant sequential improvements from the fourth quarter in all three of our channels and have seen further acceleration in the second quarter to date. I'll provide an update on our progress in each channel, starting with e-commerce, which is the biggest contributor to our comp growth. As we drive to our billion-dollar in e-commerce demand goal by 2024, we will leverage data to provide more relevant, compelling experiences that bring the versatility of our assortment to life in a more personalized way for our customers. We made significant progress toward this goal in the first quarter, posting a positive 40% increase in demand, and that has further accelerated to up over 70% in the second quarter to date. Conversion is up 19% compared to last year, and these results were all achieved on far fewer deep site-wide promotional days. Average order values showed sequential improvement during the quarter, with AOV up 6% in March and April combined and compared to last year. AOV has been challenged by the impact of the pandemic on traditionally higher price point categories, such as dresses and suits, so it is especially encouraging to see this improve. As more restrictions are lifted and more people resume social gatherings, occasions, and going into offices, I expect it will continue to rise. We enhanced our mobile app experience to bring it closer to parity with our website, including a new digital wallet functionality and outfit building tool. For the remainder of 2021, We will be adding capabilities including user generated content and live chat for real time suggestions and advice from a digital stylist. We achieved a 41% increase in demand driven through the mobile app and are moving quickly towards a seamless digital customer experience. We launched a deferred payment feature through Klarna in the third quarter of last year and have seen a 27% higher AOV for customers who choose this payment option. We increased the amount of user-generated content and applied it across all of our digital properties with a particular focus on product pages and social media, where we know customers are making real-time purchase decisions. In the first quarter, we featured user-generated content on approximately 40% of our product pages with 10% higher conversion than the average. And our goal is to double the number of pages that feature user-generated content in the back half of this year. We continue to expand our digital stylist program and saw a 25% increase in demand and an 18% increase in AOV in the first quarter. Only a small percentage of our customers use this feature today. So as we increase coverage and expand the number of stylists, we expect this program to grow. We continue to drive success with our outfitting recommendations tool with 20% higher conversion and 6% higher AOV on product pages with this feature. We will expand the use of this tool across our site and app experience so customers will be able to shop trends and outfits as easily online as they already do in our physical stores. We have expanded our marketplace business and now feature over 80 brands that complement and broaden our express brand assortment. Marketplace allows us to stay focused on what we do best while offering great product from complementary categories such as active, swimwear, and home. The Express Style Trial Rental Program continues to resonate with our customers. We have more than doubled our women's membership and have exceeded our expectations in men's. This program offers our customers the opportunity to try our product and have newness in their closet with no ownership commitments. Our rental business is driving new customer acquisition, so we plan to double the membership over the next 18 months. Turning to retail stores, we continued to see improvement from the fourth quarter and saw a dramatic acceleration in March and April, and we've seen further improvement in the second quarter. We continued to see encouraging trends in areas where coronavirus guidelines were less restrictive. In the first quarter, where mask mandates were lifted, Our comp performance was approximately 10 percentage points better, and we're already seeing this performance materialize more broadly as states continue to lift mandates and restrictions. As I've said previously, our focus has now shifted from fleet rationalization in 2020 to fleet optimization in 2021. Fleet rationalization spoke to the number of stores we'll operate. Fleet optimization speaks to the location, size, concept, format, and perhaps most importantly, the role physical stores will play in customers' post-pandemic lives. Our mall stores can and will be more productive, and we will also expand beyond the mall. Our reduced square footage concept at the King of Prussia Mall has driven productivity double that of the balance of our fleet, and we will apply this approach to a new store at the North Park Mall in the second quarter. These stores and others like them will help us determine the optimal size of our mall-based stores, and we have tremendous flexibility with approximately two-thirds of our leases actionable over the next three years. Our ExpressEdit concept stores are valuable test and learn opportunities. We see a higher percentage of both new and reactivated customers. In the first 90 days, Our Columbus location reactivated customers at a 22% faster pace, and our Nashville location added 45% more new customers than the average store in the balance of the fleet. These stores also generated higher average dollar sales and higher conversion, with the Columbus location achieving a conversion rate over twice the company average. Express Edit stores have short-term leases in off-mall locations with strong foot traffic. that allow us the flexibility to test, learn, and modify going forward. As an example, while the Columbus location I just mentioned had strong conversion, at 1,200 square feet, it was the smallest of these concepts, too small in our view. So we closed that store a few weeks ago and opened a new store at South Lake Town Square near Dallas. We plan to operate approximately 10 express edit concept stores by the end of this year. We've already selected sites in Westport, Connecticut, and Washington, D.C., with footprints under 4,500 square feet. And true to the ExpressEdit concept, the product mix will be curated to reflect local styles and trends within each market and neighborhood. Another facet of the ExpressEdit strategy is the exploration of multiple stores in a single market. We will open two locations in Washington, D.C., where we currently operate stores in the adjacent suburbs. So testing these smaller formats in the city center will allow us to read the impact on existing stores. E-commerce sales to these zip codes and new and existing customer activity overall. Turning to our outlet stores. Once we began flowing the first deliveries that reflected the ExpressEdit design philosophy in March, we saw an acceleration in comparable sales that continued as we moved through the quarter. And our second quarter to date comp sales in our outlet channel our NAR tracking ahead of 2019. We are bringing styles from retail to outlet more quickly, which is already generating strong response, especially to our fashion product, denim, and express essentials. The entire outlet assortment will reflect the express edit by the third quarter. And while outlets represent an important value component of our holistic channel strategy, all of the progress we have made from a product perspective has allowed us to be less promotional in this channel as well. Now, turning to the four foundational pillars of our strategy, let me take you through what we've done, the results we've achieved to date, and what is still to come. I'll start with product. We established new core programs and introduced big ideas, such as denim and express essentials, balanced with fashion, tested and built inventory behind what worked, and we've seen incredible customer response. The new fashion deliveries are exceeding our expectations with sell-throughs in the first quarter up double digits compared to 2019. Average unit retail is 9% higher and merchandise margins approximately 400 basis points higher. Our early second quarter deliveries in May have achieved a total sell-through of almost 40% higher than in 2019. We put a stake in the ground last year to become a more powerful player in the denim market, and our results are outstanding. In 2019, only 8% of Express customers purchased our denim, and today we are at 24%. We saw significant acceleration in our denim business in the first quarter, selling over a million units, resulting in a positive double-digit comp in our retail channel across men's and women's as compared to 2019. This was driven by the introduction of new leg shapes, new fits, and the Denim by You customer co-creation assortment. This newness not only drove sales, it also attracted new customers. In the first quarter, we had over 18% new customer penetration in denim, one and a half times that of 2019. Our Express Essentials program is the second component of what we refer to as the new core, and we have also exceeded our expectations here. We made real progress during the quarter, selling over a million units across men's and women's and driving a 48% comp in our e-commerce channel. Express Essentials drove as much volume and as many unit sales in the first quarter as it did in the entire fall 2020 season. The performance was driven in women's by the launch of body contour, compression, and high compression programs. In men's, the continued success of our polo business, the expansion of our X logo icon and PK polos and tees, plus enhanced fabrics and fashion details contributed to a positive comp of 10% versus 2019 in men's knit tops. As these new core elements of our business are performing well, the where to work and occasion-based categories that have historically been our strengths are starting to show signs of recovery. For example, Store sales plus demand in men's suits went from down 41% in February to down 23% in March and April time period, and second quarter to date are relatively flat. In women's, dresses went from down over 56% in February to down 25% in March and April, and second quarter to date are down just 14%. And our woven tops business has progressed from down 52% in February to down 31% in March and April and are down single digits second quarter to date. While it will of course take time to fully recover in these categories, we are very encouraged by these early signs and our core inventory is well positioned to take advantage of the demand. In fact, Our first quarter receipts were down 25% compared to 2019 as we took a cautious planning approach coming into 2021. However, our confidence grew during the quarter and our new go-to-market process allowed us to be more agile and aggressive. And as a result, our second quarter receipts are positioned to be 3% higher compared to 2019. Turning to our second pillar, brand. Restoring the relevance of the Express brand was a top priority, and brand tracking measures, social media engagement, and customer feedback indicate that we've made good progress since first introducing our new brand positioning in August of 2020. Our brand purpose, to create confidence and inspire self-expression, comes through in all of our marketing, in the way we engage customers, and in our marketing tactics across channels. Engagement metrics have increased across social channels with Instagram up 8% and Twitter up 140% compared to 2019. We are expanding our presence on TikTok and just completed a campaign called Express Reentry to inspire customers to reconnect with style as they get ready to return to some of their pre-pandemic routines. The campaign, which is a new and innovative way to connect our brand to our customers through a shared enthusiasm for fashion, has been viewed over 14 million times. The health of our brand is improving, as evidenced by the increase in traffic metrics, with organic search up 44%, direct load up 8%, and email-driven traffic up 3%. Our Dream Big project, which launched at the end of 2020, supports organizations and individuals whose mission aligns with our brand purpose. In addition to financial support, We use our social platforms to drive awareness and visibility for their efforts. Since the project began, we have raised over $500,000 to support those organizations who share our commitment to creating confidence and inspiring self-expression. We tested a purpose-based initiative in 40 of our retail stores called Random Acts of Confidence, which empowers sales associates to give product to customers in need of a confidence boost. The feedback from stores and customers has been overwhelming, and we plan to expand the program in the third quarter. I'll share just one example of the very real and personal impact of our brand purpose. A woman came into one of our stores in Carmel, Indiana and shared with a sales associate that she was making a career change and would be starting her new job in a few weeks. She had been a nurse for many years and always wore scrubs to work, but for her new job, she would have to dress very differently. She needed a number of things, but couldn't afford the piece that she loved most, a terrific draped sleeve mock neck dress. So we surprised her with a random act of confidence and gave her the dress as a gift from Express. The sales associate felt so good thinking about giving this customer confidence on her first day at her new job. Our third pillar is customer. And we have driven strong results through the Insider Loyalty Program relaunch in the first quarter, delivering better engagement and increases across customer acquisition and reactivation, while reducing the number of lapsed customers. Express Insider members have tremendous lifetime value. They spend on average two times more than non-members annually, their retention rate is eight times greater, and new members are nearly two times more likely to make a second visit within their first 90 days. With the launch of the new tiers and earnings structure at the end of March, we have seen improved profitability in the utilization of rewards with a 6% increase in sales and a 38% decrease in markdowns tied to reward redemptions compared to 2019. Additionally, 19% of existing Express Insider customers re-engaged with the loyalty program by qualifying for the new $5 Express cash reward. We continue to have positive momentum with customer acquisition, which was up 7%, with reactivations up 25%, and lapsed customers down 36% compared to 2019. Additionally, all channels saw an improvement in Express Insider transactions, with e-commerce up 30% compared to 2019, while New Express Insiders drove an impressive 16 percentage point trend improvement in transactions quarter over quarter compared to 2019. We initiated a lapsed customer reactivation strategy at the end of the first quarter with direct mail messaging, a strategic customer targeting program, and paid media. And the early results are very encouraging. Total reactivated customers increased by 22% in the quarter compared to 2019. These results were double what we anticipated. Over the last year, we have completely reimagined our marketing approach and reallocated our investment across the marketing mix. We have increased engagement with our customers in new and creative ways and with more relevant and authentic content. Through ongoing dialogue among our top loyalty program members and our design and merchandising teams, we are able to better understand our customers' evolving wardrobe needs and style preferences. As a result of this dialogue, we developed a customer co-created denim assortment called Denim by You. This was one of our fastest selling collections for the quarter at over 230,000 units, generating over 100,000 new customers. As a result, we have exceeded our customer acquisition and retention plans. In fact, almost one-third of our customers in the first quarter were new to the brand, and new customers in our e-commerce channel increased by over 27% compared to 2019. Our final pillar, execution, is both a through-line across product, brand, and customer, and the evolution of our operating model as the 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, conversion was driven by new customer experience model, new associate education programs, and continued focus on loyalty sign-ups. Another key component of execution is inventory management, and we have significantly improved our inventory level and composition versus the end of the fourth quarter. which positions us well to flow more new product as we head into the second quarter and the back half of the year. Our historical strength in categories such as men's suits and women's dresses position us well for continued improvement, especially as gatherings and occasions are expected to increase throughout the balance of the year. Product, brand, customer, and execution. Across each one of these pillars, we have meaningfully advanced the Expressway Forward strategy, and we are committed to driving long-term value for our company and our shareholders. I expect that our sales and profitability will accelerate as we move through 2021, and that we will deliver positive operating cash flow in the second quarter and positive EBITDA in the third quarter. Perry will provide more detail on our first quarter results and share our view for the balance of the year.