Express, Inc.

Good morning. My name is Christy and I will be your conference operator today. At this time, I would like to welcome everyone to the Express, Inc. second quarter 2021 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. I would now like to hand the conference over to Greg Johnson, Vice President of Investor Relations. Please go ahead.

Thank you. 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 former moving statements within the meaning of the Private Security 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. All commentaries are on year-on-year comparisons, and our prepared remarks today refer to 2020 unless otherwise noted. Today, we will speak to our second quarter performance, including the positive acceleration we are seeing as the Expressway forward strategy continues to gain momentum, and the evidence and information is well underway. Tomorrow at 11 a.m. Eastern time at a virtual investor event, members of our management team will share what has been accomplished across each of the four foundational pillars of our strategy, and more importantly, how we will continue to generate profitable growth over the next several years. I hope all of you will join us. With me today are Tim Baxter, Chief Executive Officer, Matt Bullering, President and Chief Operating Officer, and Terry Cleo, Chief Financial Officer. I'll now turn the call over to Tim. Thank you, Greg, and good morning, everyone. Our second quarter performance can be summarized in a single word, acceleration. Results in each one of our channels were very strong on both the top and bottom line. The Expressway Forward strategy continues to gain momentum, and the evidence that our transformation is well underway continues to build. Sales in the second quarter grew 86% over 2020, and delivered a positive 3% comp compared to 2019. Stores plus demand comps accelerated considerably throughout the quarter, driven by inflection points at Memorial Day and the Fourth of July. Post-4th of July through the end of the quarter, we drove a positive 11% comp versus 2019 and have continued to deliver a double-digit comp in August. Through a combination of outstanding product and a compelling brand positioning, we were able to significantly reduce our promotional activity, and as a result, drove a 200 basis point merchandise margin expansion and delivered gross margin improvement of over 500 basis points versus 2019. We generated positive operating income of $15 million and adjusted EPS of two cents, both significant improvements versus 2019 and 2020. Second quarter EBITDA of $31 million was $20 million greater than 2019 and ahead of our initial expectations. And we achieved free cash flow of $57 million in the first half of the year. I'll be sharing much more about the progress we've made and what's next on the Expressway Forward at our virtual investor event tomorrow. But I'll provide some highlights across the four foundational pillars of our strategy today. Product. You've heard me say that if we get everything else right but don't have great product, we won't be successful. We have applied the ExpressEdit design and merchandising philosophy across every category and every item. And I am incredibly proud of where we are today. Even more importantly, customers are responding with tremendous enthusiasm, and of course, theirs is the opinion that matters most. Versatility is one of the key ideas within the Express Edit, and we identified denim and knits as two of the most important elements of a modern, versatile wardrobe. Our new core of denim and Express Essentials are an integral part of the redefinition of Express, and customer response has been incredibly strong in both categories. We have a sharp focus on denim and are a much more powerful player than we were a year ago, posting our best denim performance in recent history and delivering a 21% comp increase in Q2 versus 2019. Our tops business is back, driven by Express Essentials. In women's, body contour is driving unbelievable growth. accounting for 36% of women's retail knit sales and driving a 20% increase in the category over the prior quarter. In men's, polos and graphic tees delivered the best second quarter volume in recent history with significantly higher margin rates. The where-to-work and occasion-based categories that have historically been our strength, but were of course negatively impacted by the pandemic, are gaining significant momentum as our customers venture back out into the world, and we've seen an acceleration as the year has progressed. Our comps in these categories versus 2019 were down 36% in the first quarter, down 12% in the second quarter, but are now tracking close to flat. These categories represent a meaningful opportunity for us in the back half of the year, and we are very well positioned to meet the needs of people returning to offices, social gatherings, and occasions of all kinds. Brand. We set out to reinvigorate our brand, clarify our message, and articulate a clear, compelling brand purpose. Our brand tracking measures, social media engagement, and customer feedback indicate that we've made great progress. Organic engagement metrics were up across all social channels compared to 2019, with Instagram up 10%, Facebook up 80%, and Twitter up 700%. Our paid social engagement increased 210%. Express Reentry, our brand's first TikTok campaign, drove over 49 million total impressions across paid and organic social and 4.4 billion media impressions. Google organic demand improved throughout the quarter and turned positive in the second quarter compared to 2019, culminating in a 13% increase in the month of July. Organic search traffic was up 5% and demand increasing 14% over 2019. Customer. We said that we would engage our existing customers and acquire new ones. We relaunched the Express Insider Loyalty Program in Q1. And in the second quarter versus 2019, spend per existing customer was up 8%. Acquisition of new customers was up 17%. and reactivation of lapsed customers was up 43%. We have welcomed over 1.1 million new insiders and reactivated 900,000 lapsed customers since the relaunch. Excuse me. Loyalty members redeeming express cash rewards drove a 64% increase in sales, with a 14% decrease in markdowns associated with those sales versus 2019. Execution. This is the through line across our product, brand, and customer strategies, and the ultimate test of our operating model, systems, and processes. Second quarter was the first time our new seasonal strategies came to complete fruition, and the results are a powerful testament to the strength of our go-to-market model and how aligned we are as a total organization. We effectively responded to the impacts of the pandemic. particularly navigating through the many supply chain challenges and disruptions, and applied strong financial acumen and discipline around our expenses and our investments. Outstanding execution is also what helped drive momentum in each one of our channels and reinforced the ability of our strategy to effectively advance our e-commerce, retail, and outlet businesses. Let me begin with e-commerce. We previously announced our goal to drive $1 billion in e-commerce demand by 2024, and we are on track. We drove a 15% increase in transactions and a 13% increase in average order value, which resulted in a 28% comp and a 20% comp compared to 2019. These results were driven by our product and brand strategies, as well as the impact of a number of digital advancements. We redesigned product pages with an outfitting tool, so shoppers can clearly see the details that differentiate our products. We added even more user-generated content to our product pages, and our digital stylists offer real-time advice and recommendations. All of these are driving meaningfully higher conversion and average order value. We upgraded our mobile app experience to bring it closer to parity with the enhancements we had made on our website, and now have over 2 million active app users, and that's growing. In the second quarter, app demand was up 70%, traffic grew by 30%, and conversion increased 70 basis points over 2019. These are some of our most important customers because they make nearly four more visits and spend over $200 more annually than customers who only shop on our website or in our stores. We recently announced an exciting new program called Express Community Commerce, which offers fashion-savvy entrepreneurs an opportunity to apply their sense of style to our product and fulfill our brand purpose to create confidence and inspire self-expression throughout their social networks. We call these individuals Express Style Editors, and they will have exclusive access to specially designed collections to help them drive sales and earn commission. We launched the pilot phase of this innovative program in July, and we'll share much more about the program at our virtual investor event tomorrow. Our retail store sales gained momentum throughout the quarter, and we delivered a positive comp in July, despite inventory that was down double digits compared to 2019 in the stores. Our performance was driven by a 25% increase in average unit retail versus 2019 due to the outstanding consumer response to our new product and a significant reduction in promotional activity. Physical stores are an important contributor to a successful retail business, and they are certainly an integral part of the Expressway Forward strategy. Our fleet optimization strategy informs both current and future real estate plans. One component is a reduced square footage concept we first implemented at our King of Prussia store. Second quarter sales were 12% higher than 2019, a remarkable result given the 45% reduction in square footage. We are remodeling our North Park store now in Dallas based on this learning. These stores and others like them will help us to determine the optimal size of our future mall-based stores. We are also expanding beyond the mall with smaller footprint Express Edit concept stores in off-mall locations that present tightly curated and localized assortments. We currently have five Express Edit concept stores, all under 4,500 square feet. New customers represent nearly 50% of total customers, and reactivation is 20%, meaningfully higher than our mall-based stores. The second quarter was the first time our outlet assortment was aligned to the ExpressEdit design and merchandising philosophy, and we drove record second quarter volume and a 7% comp compared to 2019. Product, brand, customer, and execution. Across each one of these pillars, we have meaningfully advanced the Expressway Forward strategy and are well positioned to drive long-term value for our shareholders. Perry will provide more TPL on our second quarter results and share our view for the balance of the year.

Thank you, Tim. I'll start with our second quarter results, discuss our liquidity position, and provide a high-level outlook on the balance of the year. My comments on comparisons will be to 2020 with some additional color on our performance versus 2019 and on quarter over quarter where those are relevant and meaningful. Second quarter net sales were $458 million, an increase of 86%, and consolidated comparable sales were up 42% both compared to 2020. Compared to 2019, consolidated compatible sales were positive 3%, with total retail comps at plus 1% and express factory outlet comps at plus 7%. These results were achieved with a significant reduction in promotional activity, reflecting the strength of our product and brand strategies. As a result, merchandise margin accelerated by 2,500 basis points compared to 2020. Compared to 2019, merchandise margin increased by 200 basis points, and we expect merchandise margin in the second half of the year to be slightly below 2019, driven by disruptions throughout the supply chain. Ban and occupancy expenses leveraged 2,500 basis points versus 2020. This improvement was driven by increased sales and rent reductions. Compared to 2019, Binding occupancy expenses leveraged 390 basis points, driven by significant reductions in our expense structure. During the second quarter, we had a gross profit of $149 million, with a gross margin rate of 32.6%, an increase of over 5,000 basis points as compared to 2020. This also reflects a sequential improvement over the first quarter of 2021, and we expect the gross margin rate in the second half of the year to be higher than 2019 levels as sales continue to grow and our results reflect the power of our product, brand, and customer strategies. Compared to 2019, gross margin increased by over 500 basis points. SG&A expenses were $135 million, leveraging by 840 basis points compared to 2020, driven by our sales increases. During the quarter, we reinvested a considerable amount of our markdown savings into marketing, primarily focused on customer acquisition. Second quarter operating income was $15 million compared to a loss of $136 million in 2020 and a loss of $10 million in 2019. Second quarter diluted earnings per share was 15 cents on a GAAP basis compared to a loss of $1.67 in 2020. Excluding the benefit of a $9 million reversal of a valuation allowance booked against our deferred tax assets, Our adjusted diluted earnings per share was two cents. Our effective tax rate for the second quarter was essentially zero, and it reflects the benefit of the previously mentioned reversal of the valuation allowance recorded against our deferred tax assets. Excluding this benefit, our effective tax rate will have been approximately 84% driven by a true-up from the first quarter provisions due to a significant improvement in forecasted pre-tax results. EBITDA was $31 million during the quarter, a $149 million improvement versus 2020, and a $20 million improvement versus 2019. Our second quarter performance resulted in positive EBITDA, one quarter ahead of expectations, and dropped positive EBITDA of $7 million for the first half of the year. Turning to our balance sheet and cash flow, we ended the quarter with $34 million of cash and cash equivalents. For the first half of the year, operating cash flow was $68 million. and free cash flow was $57 million, both of which improved by $238 million versus 2020. Our inventory levels and composition improved significantly throughout the second quarter, with the majority of the deliveries coming late in the quarter. We began the second quarter with inventory down 7% to 2019. and ended with inventory of $267 million, down 1%. Compared to 2020, our inventory was up 15%, which reflects the impact of the pandemic-related inventory cuts we executed in 2020. During the second quarter, we received $45 million against our CARES Act receivable. Our balance sheet at the end of the second quarter now reflects the remaining $52 million of CARES Act receivable, which we expect to receive late in the year. Our borrowings at the end of the second quarter were $122 million, of which $25 million was drawn against our existing ABL credit facility, and the remaining $97 million was drawn on our term loans. Total borrowings decreased by $111 million, and our liquidity is solid, with $137 million available for borrowing under our revolving credit facility at the end of the second quarter. Moving to our outlook, based on the strength of our second quarter performance, we're providing an improved outlook for the second half and full year of 2021. net sales above 2019 levels on a compatible basis for the second half of the year, gross margin rate approximately 200 basis points above 2019 levels for the second half of the year, net interest expense of $6 million for the second half of the year, positive free cash flow for the full year, and capital expenditures of approximately $35 million for the full year. our comps accelerated through the seventh quarter and into August. That said, we're closely following the continued impact of the pandemic on consumer behavior and throughout the supply chain. Recognizing the momentum of our business and tempered by this potential headwind, we have taken a balanced approach with our outlook. To summarize, we have significant momentum in our business across all channels. and a continued strong response to new fashion receipts. Our outlook has improved throughout the year. We're well positioned for 2021 and to achieve our long-term goal of a mid-single-digit operating margin. And now, I will turn the call back to Tim.