Express (EXPR) Q3 2023 Earnings Call Transcript

Express (EXPR)
Q3 2023 Earnings Call
Nov 30, 2023, 9:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning. My name is Krista, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Express, Incorporated conference call [Technical difficulty] third-quarter 2023 earnings. All lines [Technical difficulty] any background noise.

After the speakers' remarks, there will be a question-and-answer session. [Operator instructions] Thank you. I would now like to hand it over to Greg Johnson, vice president of investor relations. Please go ahead.

Greg Johnson -- Vice President, Investor Relations

Thank you. Good morning, and welcome to our third-quarter 2023 earnings conference call. Our third-quarter 2023 earnings release can be found at our Investor Relations website, and this call will be available for replay. I'd like to open by reminding you of the company's safe harbor provisions.

Today's call may contain forward-looking statements. 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. For a description of the risks that could cause our results to differ materially from those described in forward-looking statements, please refer to our 2022 form 10-K and our other filings with the SEC which are posted on our Investor Relations website.

These risks and uncertainties are further detailed in the earnings release. These statements represent our current judgment. Express assumes no obligation to update any forward-looking statements whether as a result of new information, future events, or otherwise, except as required by law. In addition, we may refer to certain non-GAAP measures.

You can locate a reconciliation of any non-GAAP measures discussed in our comments to amounts reported under GAAP in our earnings release. We will also be providing financial comparisons to prior periods, and our prepared remarks today refer to comparisons to the corresponding periods in 2022 unless otherwise noted. Please see the explanatory notes in the earnings release for additional details regarding the definition of certain terms. With me today are Stewart Glendinning, chief executive officer; and Mark Still, interim chief financial officer.

I will now turn the call over to Stewart.

Stewart Glendinning -- Chief Executive Officer

Thanks, Greg. Good morning, everyone. Let me begin by thanking the board and the entire Express organization for the opportunity to lead this company. I've been in the consumer products industry for much of my career, managing and growing global brands, as well as serving as the chief financial officer of multinational companies.

My experience with consumers, operations, and finance is well suited to the challenges facing Express. After joining the business a little under three months ago, my focus has been on the pathway to recovering the company's full profit potential. This includes accelerating our cost reduction initiatives and launching new ones intended to improve our business performance and liquidity. Today, I'm going to share with you the results from Q3 and then discuss my early thoughts on the path to recovery.

Our third-quarter sales and diluted loss per share came in below the low end of our outlook ranges. The macroeconomic environment remains challenging, and the consumer and competitive landscapes were highly promotional. Operating margin in the third quarter was a negative 6.3% versus a negative 6.8% the same quarter last year. This was driven by weakness in our top line, which was largely offset by strong cost savings performance in SG&A.

In brand Express, the top line was down 7%, driven by weaker results in our retail and outlet stores, partially offset by a 10% increase in online sales. In the Express brand, unit sales were consistent with our expectations. However, moving through this inventory required more extensive discounting and led to greater gross margin erosion. Keep in mind that our gross margin includes the royalty expense to WHP, which negatively impacted our gross margin by approximately 370 basis points as we did not have this expense in the same quarter in 2022.

While there's more work to be done to improve year-over-year sales results, there were several positive indicators in the quarter. Our sales performance improved sequentially from Q2. We realized $30 million of cost savings which drove a 4% reduction in SG&A. And we saw real improvement in women's sales driven by the shift in our merchandising strategy.

And while traffic was weaker than expected, our conversion rates were higher than last year. We're now driving improvements in our women's business with a low single-digit positive comp anchored by strong e-commerce sales. Our men's comp was down mid double digits, consistent with Q2 results, as we continue to lap the record 2022 performance, particularly in suits. To offset this decline, we're actively adjusting our assortment architecture through a better balance in wearing occasion, price points, and a focus on more casual tops and bottoms.

That said, we retain a strong market position with a high share of men's specialty retail. UpWest grew sales by 15% versus the same quarter last year, and Bonobos exceeded our expectations for the third quarter. The addition of Bonobos has allowed us to leverage our back office and is creating increased purchase leverage with suppliers. While Express has broad market reach and penetration, Bonobos with annual revenues in excess of $200 million, has a tremendous opportunity for increased awareness and household penetration to build on its existing scale.

The combination of in-store fitting and online fulfillment has created strong customer retention and repeat purchase, and we expect to continue to grow the top line. Having said that, we need to reinvigorate our brand Express performance and build a stronger foundation on which to realize the company's full potential. Beginning last year, we faced a number of challenges, including declines in our customer file conversion and store traffic, driven by missteps in our merchandise strategy, most notably in women's, where we were out of balance across categories, price points, and wearing occasions. This misalignment between our assortment architectures and customer demand significantly impacted our historic sales and margins.

We believe strongly there's a path to total company improvement. Four key focus areas are expected to drive the recovery and are already underway. Customer engagement, operating excellence, cost reduction, and inventory management. Let me explain a little bit more about each.

Understanding consumer motivation that is providing them with the product they want and delivering a great purchase experience are all part of ensuring customer engagement. We expect our merchandise assortment to continue to drive increased customer appeal. Our marketing efforts will reinforce our product style and quality, and our associates will ensure a positive shopping experience both online and in our stores. Across the board, we have opportunities to improve our operating execution.

This includes cycle times, in-store execution, sourcing and logistics, all parts of our business, which allow us to serve customers lower our cost base and beat the competition. As part of this effort, we expect some rationalization of our store count as we close high-effort, unprofitable stores. On cost reduction, we're making good progress and expect to meet the commitments we made. In 2023, we identified and implemented a $120 million in annualized expense savings.

We realized $30 million in Q3 and will realize a total of $80 million for the full year 2023. The remaining $40 million will be realized in the first half of 2024. We are committed to over $200 million in savings by 2025, which is inclusive of the $120 million in annualized savings in 2024. It also includes $50 million in gross margin expansion opportunities by leveraging efficiencies in sourcing, production, and the supply chain.

This is a great start, and I believe we can do even more. Lastly, we're driving changes to ensure lower inventories and higher turn rates. This will not only reduce our borrowings, it will also enhance our operating effectiveness as store backrooms and warehouses are not hampered by excess product. We expect a meaningful reduction in inventory during 2024.

Now, these areas are just the beginning of our efforts to return Express to profitability. In the longer term, we expect to advance our partnership with WHP Global, and the opportunity here is twofold. First, earlier this month, WHP announced the signing of long-term licensing deals to bring the Express brand to Indonesia and Paraguay, grow our presence in Mexico, and expand our retail footprint in Central America with the opening of four new Express retail flagship stores through 2026. Royalties from these ventures, as well as noncore domestic licensing, will now flow into the partnership, and Express will receive its 40% share in net of costs.

The second component of this strategic partnership is pursuing acquisitions. Our first acquisition was Bonobos, which we completed in the second quarter. And since then, Bonobos' sales have exceeded our outlook, and they're on track to deliver positive free cash flow for the full year. We expect to leverage this agreement for further acquisitions in the years to come.

Now, let me introduce Mark Still. Mark has been with the company for nearly 20 years and has just assumed the interim CFO role. He will provide further detail on our Q3 results and outlook for the fourth quarter and the full year. Mark?

Mark Still -- Interim Chief Financial Officer

Thank you, Stewart, and good morning. I'll begin with our third-quarter results. We expected consolidated net sales of $460 million to $490 million with approximately $50 million of sales from Bonobos. Consolidated net sales actualized at $454 million, including $52 million from Bonobos.

In the Express and UpWest brands combined, comparable sales declined 6%, which was a significant improvement over the 14% decline in the second quarter. E-commerce comps increased 10%, driven by improvements in our women's business and strong conversion increases. Retail stores declined 16%, and outlet stores were down 13%. Traffic declines and lapping record men's business contributed to the ongoing challenges in these channels.

We expect a gross margin to decrease approximately 200 basis points. We saw a decrease of 370 basis points as we increased promotions and had greater margin erosion than we originally anticipated. We expected approximately 275 basis points of leverage in our SG&A expenses, and we actualized that leverage of 300 basis points. The leverage was driven by our cost savings initiatives, which delivered $30 million of savings in the third quarter.

We expected a diluted loss per share of $5.50 to $7.50. Diluted loss per share was $9.83. Moving on to the balance sheet. At quarter-close, we had $35 million of cash and cash equivalents on hand.

Total borrowings were $278 million, of which, $213 million was drawn against our asset-based credit facility, and the remaining $65 million was drawn on our term loan. $22 million remains available under the asset-based credit facility. Inventory increased by 14% versus last year, consistent with our expectations and driven by the Bonobos acquisition. Regarding the $52 million CARES Act receivable we have mentioned previously, we are now pursuing this refund in two different pieces as a means to accelerate the payment.

The first piece is for $43 million, which is agreed upon. And the second piece is for $9 million, which is still under review. We expect to receive $48 million, which is comprised of the $43 million in cash related to the CARES Act receivable, and a $5 million reduction in our income taxes payable for 2022. It should be noted that we will continue to pursue the remainder of our claim with the IRS.

For amounts to be paid, the path forward includes approval by the IRS and the Congressional Joint Committee on Taxation. We are actively engaged with the IRS to move this claim forward given the importance of this receivable to our liquidity. Before turning to our outlook for 2023, I want to briefly comment on our early Q4 performance. Our October trends continued into the first half of November, while in the back half of November, sales improved and were more in line with last year.

With that in mind, as we turn to our outlook for 2023, our fourth-quarter and full-year outlooks have been updated and taken into consideration the continued uncertain consumer and macroeconomic environments balanced against our quarter-to-date performance, the impact of the $80 dollars in expense reductions that we will realize, as well as the expected performance of Bonobos. As a reminder, the full year of 2023 will include a 53rd week with the fourth quarter of 2023 consisting of 14 weeks. The 53rd week is estimated to add approximately $25 million of net sales in the fourth quarter. Our outlook for Q4, compared to the fourth quarter of 2022, is as follows: net sales of approximately $565 million to $590 million, including the 14th week and approximately $60 million in Bonobos net sales and operating margin of negative mid single digits.

Our outlook for the full year compared to the full year of 2022 is as follows: net sales of approximately $1.84 billion to $1.865 billion, including the 53rd week and approximately $150 million in Bonobos net sales, diluted loss per share of $46 to $50, and capital expenditures of approximately $25 million. And now, let me turn the call back to Stewart.

Stewart Glendinning -- Chief Executive Officer

Thanks, Mark, and thanks for attending the call today. Our team here at Express believes in the full potential of our business, recognizes the current challenges, and is actively engaged in driving the changes that will restore liquidity and move the business back to profitability. I'll now turn the call over to the operator, and we'll take your questions.

Questions & Answers:

Operator

Thank you. [Operator instructions] We also ask that you limit yourself to two questions and a follow-up. Your first question comes from the line of Dana Telsey from Telsey Advisory Group. Please go ahead.

Dana Telsey -- Telsey Advisory Group -- Analyst

Good morning, everyone. And welcome, Stewart, and hello, Mark. Stewart, if you've been there now --

Stewart Glendinning -- Chief Executive Officer

Good morning, Dana.

Dana Telsey -- Telsey Advisory Group -- Analyst

Hi. As you've been there now just around two months and you mentioned the men's and the women's business, what do you see to that -- where are you in the steps to getting the women's business back on track? How are you thinking about the men's business? What's the process, and what's the prognosis for the timeline? And, Mark, when you think about the store base and the online channels of distribution, how do you think about the expense structures of each? What does a opportune store base look like to you? And as we go through this holiday season, how do you think of promotions versus full price, and where are you on the merchandise margin journey? Thank you.

Stewart Glendinning -- Chief Executive Officer

All right. Well, Dana, thank you. That's -- that's a good set of questions there. Let me pick up on the merchandising strategy because this is actually a place where I think we're in pretty good shape.

And the reason for that is that we've got a new leader of this space, Michael Rengel, who is top notch. He's already shifted the merchandise strategy, and you saw it kick in in this quarter. I mean, women had a -- have historically, in the last couple of years, had a pretty rough time. We saw positive comp in women this quarter.

It was terrific. Our knit tops delivered better than 20% growth. Sweaters and woven tops were up. Bottoms were up.

I mean, our worst category in women was tailoring, and that came in at a minus one. So, I mean, I think broadly, women are in good shape. Men are in a different place. They are a lot weaker, and the primary reason there is that last year was such a strong year in suits.

And it was a tough comp for men to go up against. But even inside of men, I mean, when you look at sweaters, Michael's team rolled out a new set of sweaters and sweater tops. That was a strongly performing category. In the spaces where we've moved more to casual, we're seeing a strong performance, and that's what you're going to see coming up in the quarters to come.

Mark Still -- Interim Chief Financial Officer

And, Dana, coming from a -- sticking with the merchandise as we think about the fourth quarter and our promotional stance versus full ticket, you know, I would say we continue to be in a highly promotional environment, especially here in holiday. What I would say is that we are continuing to see great adoption of our go-forward product. And we will continue to focus on that go-forward product. But in the midst of holiday coming out of Black Friday and moving into the Christmas period, we do expect to continue to see a very highly promotional environment.

But as we move into next year and as we've mentioned the go-forward cost savings that we are expecting to see as we move into 2024 and 2025, we will expect to see benefit over time. And then getting to your -- the second part of your -- yeah, second part of your question as it relates to stores versus e-com. You know, as we mentioned in the prepared remarks, we had a plus-10 comp from an e-commerce standpoint, saw great growth, great conversion growth especially within e-com. And as we also mentioned in the remarks, you know, we're going to continue to look at our store affiliate.

We will continue to evaluate it, and if we have high-effort, unprofitable stores, we will look at potentially closing those locations.

Dana Telsey -- Telsey Advisory Group -- Analyst

Got it. And then just, Stewart, as you think about the competitive landscape of Express and, obviously, when you were looking at joining the company where you wanted to take the business, how do you envision what Express should look like over the next year, what you think the steps are to reinvigorate and see Express be a growth company? Thank you.

Stewart Glendinning -- Chief Executive Officer

Yeah. Well, great question. I'm going to reiterate some of the points that I made in the prepared remarks. But first of all in coming to the company, I saw a really strong brand.

Express has been around a long time. It's got a loyal customer base. And I think the -- the sort of missteps here, as best I could read the story, was that we had gotten a little bit away from where our consumer was buying, and we were serving up a set of products that were not aligned with with the customer set. What you've seen more recently are two changes.

One, us getting back to more of the Express basics things that we've sold over time. And two, us moving a little bit more to where the consumer is broadly, that is to say more casual. I think coming out of coming out of COVID, that more casual dress has persisted, and our and our assortment will will reflect that. But I think that that's part of the journey where I feel very confident because we've got a good strong team there.

In the rest of the business, as I looked at the business, I saw a broad set of opportunity. And that has only been confirmed in the first couple of months here. There's an absolute opportunity here to engage more aggressively with customers through branding and through messaging to customers and, in fact, in the way in which we serve them both online and in stores in their purchase experience. Coming from a deep operations background as well, as I look across the business and consider the ability for us to shorten cycle times for us to get better at operating the business just in terms of moving product around, getting our stores in fighting shape, I look across the business, there are a ton of opportunities.

And you will see those as we go through the next few quarters. We've spoken extensively to cost reduction, and I think the team's already doing a great job there. The only thing I'm doing frankly is to try to deepen that and accelerate it, but we will hit the 200 million, I'm confident of it. And finally, I think, if you look at inventory, you know, we're not turning enough in the business.

That inventory needs to move through more quickly. The benefit of that, frankly, is we'll have a lower interest bill, and inside of our own operations, you'll see less cluttered back rooms and stores. You'll see warehouses that aren't jammed up. And, frankly, that will leave us in a place where we're just a much healthier business.

Dana Telsey -- Telsey Advisory Group -- Analyst

Thank you.

Operator

Your next question comes from the line of Eric Beder from SCC Research. Please go ahead.

Eric Beder -- SCC Research -- Analyst

Good morning.

Stewart Glendinning -- Chief Executive Officer

Good morning, Eric.

Mark Still -- Interim Chief Financial Officer

Good morning, Eric.

Eric Beder -- SCC Research -- Analyst

I want to talk a little bit more about inventories. If you take out Bonobos, what was the inventory impact on the -- what was the inventory without Bonobos? And when should we start expecting to see the inventory, I guess, with or without Bonobos start to come down?

Mark Still -- Interim Chief Financial Officer

Yeah, Eric, I can take the -- I'll start with the first part of that question. If we exclude Bonobos, our inventory was flat compared to last year. So, Bonobos added roughly $58 million of inventory. That obviously was not in our inventory last year.

When it comes to the second part of your question as it relates to starting to see that come down, we are intensely focused on improving our working capital and improving our inventory position. So, it is a focus of ours to make a meaningful reduction in our overall inventory levels as we move to the end of this year and through 2024.

Stewart Glendinning -- Chief Executive Officer

Yeah, I mean, sure, Eric. You should start to see that in the first half of '24.

Eric Beder -- SCC Research -- Analyst

OK. Question for you. I guess the second question is WHP and the agreement there, I know you mentioned some international expansion opportunities. When do you think those will start to impact? I guess, the other question is, you know, you had a great acquisition of Bonobos.

Do you have the financial -- if you can believe you have the financial flexibility to do other acquisitions here in kind of the same structure?

Stewart Glendinning -- Chief Executive Officer

Let me just -- let me start at the most important part first. Our primary focus here is driving the EXPR back to profitability. That's job one, job two, and job three. The WHP partnership is something that will benefit us absolutely over the longer term, both because of the royalty sharing that we spoke of in our prepared remarks.

That's in no way distracting to us. These are operations that are separate from our operations. They will be licensed and overseen by the WHP partnership, and we will collect the benefit as being an owner of that. So, that is broadly just beneficial to us without extraordinary effort from us.

On the second part, as it relates to acquisitions, you know, we're going to take that over time. Bonobos was a great opportunity for us. We're super happy that that brand, which is a powerful brand with a long runway ahead of it, is part of our organization. But right now, job one, two, and three is focusing on getting EXPR back to health.

Eric Beder -- SCC Research -- Analyst

What do you look at -- when you look at the -- what do you think of the potential longer term for Express in terms of its ability to -- what do you think the longer-term opportunities are in terms of margins, in terms of the ability to size other pieces for Express? I know you've only been there two months, so I'm not expecting you -- but what do you think about that?

Stewart Glendinning -- Chief Executive Officer

Eric, I think it's a great question. Frankly, of course, coming -- when you make a big change like this, you think carefully about what the possibilities are for the business. I'll just take you back to 2018. I mean, 2018 was a healthy year, wasn't a -- wasn't an extraordinary year for the business.

And if I were going to set a benchmark for, you know, for a place to go back to that, that's what I would look look to. And and you can go back and look at those financials. But you sort of -- you were living with gross margins around 30% and a positive net income. I think that that to me is the starting point, but -- but this is a business that has all the right building blocks.

And I think if you give me the opportunity to sort of get through this next quarter, coming back in at the end of the year, we'll give you a good set of expectations for 2024 and give you a little bit more detail on what we think the glide path looks like to recovering the full potential in the business.

Eric Beder -- SCC Research -- Analyst

OK. Good luck for the rest of the holiday season.

Stewart Glendinning -- Chief Executive Officer

I appreciate that. Thank you, Eric.

Mark Still -- Interim Chief Financial Officer

Thanks, Eric.

Operator

[Operator instructions] Your next question comes from the line of Marni Shapiro from Retail Tracker. Please go ahead.

Marni Shapiro -- Retail Tracker -- Analyst

Hi, everybody. Welcome, Stewart and Mark. Nice to meet you. I'd like to just dig in a little bit more to the merchandising changes.

It sounds a little bit like we're moving the pendulum back a little bit to where Express was, you know, Portofino shirts, key items. If you could just dig into that a little. And is -- excuse me. Is that visible? I was in the stores all weekend.

I'm there all the time. I've seen some changes in the store. Is this what I'm seeing, and how much more is to come? And could you also just talk a little bit about what's going on to the outlets? It seems like that customer is definitely the more price sensitive, but other brands have talked about how the outlets have been a bright spot because the consumer is more price sensitive.

Stewart Glendinning -- Chief Executive Officer

Yeah. OK. Well, let me take the second half first, and then I'm going to give you the benefit of getting a little bit of explanation directly from our chief merchandising officer because I think he's going to give you a little more granularity. But look, on outlets, I would say that outlets weren't a particularly bright spot for us.

They are a bright spot just in terms of of being part of the profitability of our business. So, if you look at the margin structure, outlets are a very good part of our business. But if you look at this past quarter, for us, the winner was e-com, and we were up 10% in business in e-com. The performance was strong there, and that's where we won women back.

So, I would say that that's how our third quarter played out. But realistically going forward, each one of the parts of our business plays a role. You know, outlets will continue to be an important part of the strategy as e-com will get bigger and stronger, I think. Certainly, there's nothing that's going to slow that down, but every part is going to continue to play a role in the business.

Michael, do you want to talk about the merch strategy?

Michael Rengel -- Chief Merchandising Officer

Yeah, sure. Thanks, Stewart. Yeah, Marni, I would say that it's all about balance ultimately, getting back into certain icons, such as Portofino, Gramercy, is certainly part of the success that we started to see within women's. But that's only part of it.

You know, it's staying balanced across wearing occasions. So, as Stewart had said in his prepared remarks, it's leaning a little bit more casual, but it's still being polished within that. We're balancing price points ensuring that we've got a good structure across [Inaudible]. But then, a good part of it is getting back some of the customers within our icons and franchises, things such as Portofino, Gramercy.

Denim had a strong quarter, and that was reliant upon getting back into skinny, relaunching FlexX. So, I'd say it's all about a balance within that. It's not to move back to the days of old, of Portofino [Inaudible]. But the Portofino has a strong customer, and we want to make sure that we satisfy.

It's also having a balance of relevant seasonal fashion.

Marni Shapiro -- Retail Tracker -- Analyst

That makes a lot of sense. And then could you just talk a little bit about the marketing side? I know it's a lot of direct marketing, but how are you thinking about this? The Express brand, you know -- there's a lot of love for the brand for the people who love the brand. What about getting the new customers into the brand?

Stewart Glendinning -- Chief Executive Officer

Yeah. I mean, I think the -- the health of every brand ultimately is building renewal. And you're absolutely right. We have a very loyal set of customers that we look to retain.

During this past quarter. What was notable was that sequentially, we improved our customer file. The customer file had been under some pressure. And so, I was pleased to see that we're headed in the right direction.

I think there's a lot more work to be done there. I think also you see -- start to see that shift in the merchandising strategy. We're going to be pulling in a set of customers into our stores and online differently than we were in the past because of the offering. And finally, it's been a core focus of mine to take a close look at where we're spending marketing and to look at what results that spend is driving at.

I think to spend the money in marketing, you've got to be certain that you understand what returns that's driving, what kind of customers that's bringing to you. So, there's -- there's work for us to do just in terms of broad brand building, and I think all those things combined will start to bring that new customer into our store.

Marni Shapiro -- Retail Tracker -- Analyst

Great, best of luck for the rest of the holiday season.

Stewart Glendinning -- Chief Executive Officer

I appreciate that. Thank you, Marni.

Operator

We have no further questions in our queue at this time. I will now turn the call over to Stewart Glendinning for closing remarks.

Stewart Glendinning -- Chief Executive Officer

Great. Thank you very much. Well, I want to thank all of you for attending our call today. We've got a company and a group of people who are working hard over the holiday season to make it very successful.

And we all look forward to sharing our set of holiday results with you at our next call. Thank you very much.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Greg Johnson -- Vice President, Investor Relations

Stewart Glendinning -- Chief Executive Officer

Mark Still -- Interim Chief Financial Officer

Dana Telsey -- Telsey Advisory Group -- Analyst

Eric Beder -- SCC Research -- Analyst

Marni Shapiro -- Retail Tracker -- Analyst

Michael Rengel -- Chief Merchandising Officer

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