2013 Q2 10-Q
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
 
 
FORM 10-Q
 
 
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended August 3, 2013
OR
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______ TO ______
Commission File Number 001-34742
 
EXPRESS, INC.
(Exact name of registrant as specified in its charter)
 
Delaware
 
26-2828128
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
1 Express Drive
Columbus, Ohio
 
43230
(Address of principal executive offices)
 
(Zip Code)
Telephone: (614) 474-4001
(Registrant’s telephone number, including area code)
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x   No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
x
Accelerated filer
o
 
 
 
 
Non-accelerated filer
o  (Do not check if a smaller reporting company)
Smaller reporting company
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No  x
The number of outstanding shares of the registrant’s common stock was 83,853,731 as of August 30, 2013.

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FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q ("Quarterly Report") contains forward-looking statements that are subject to risks and uncertainties. All statements other than statements of historical fact included in this Quarterly Report are forward-looking statements. Forward-looking statements give our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance, and business. You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as “anticipate,” “estimate,” “expect,” “project,” “plan,” “intend,” “believe,” “may,” “will,” “should,” “can have,” “likely,” and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events. For example, all statements we make relating to our estimated and projected costs, expenditures, cash flows, and financial results, our plans and objectives for future operations, growth or initiatives, strategies, or the expected outcome or impact of pending or threatened litigation are forward-looking statements. All forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those that we expected, including:
changes in consumer spending and general economic conditions;
our ability to identify and respond to new and changing fashion trends, customer preferences, and other related factors;
fluctuations in our sales and results of operations on a seasonal basis and due to a variety of other factors;
increased competition from other retailers;
the success of the malls and shopping centers in which our stores are located;
our dependence upon independent third parties to manufacture all of our merchandise;
the availability constraints and price volatility of raw materials and labor used to manufacture our products;
interruptions of the flow of merchandise from international manufacturers causing disruptions in our supply chain;
shortages of inventory, delayed shipments to our online customers, and harm to our reputation due to distribution difficulties or shut-down of distribution facilities;
our reliance upon independent third-party transportation providers for substantially all of our product shipments;
our dependence upon key executive management;
our growth strategy, including our international expansion plans;
our dependence on a strong brand image;
our leasing substantial amounts of space;
our reliance on third parties to provide us with certain key services for our business;
our reliance on information systems and any failure, inadequacy, interruption or security failure of those systems;
claims made against us resulting in litigation;
changes in laws and regulations applicable to our business;
our inability to protect our trademarks or other intellectual property rights;
our substantial indebtedness and lease obligations;
restrictions imposed by our indebtedness on our current and future operations and our ability to pay dividends;
fluctuations in energy costs;
changes in taxation requirements or the results of tax audits; and
impairment charges on long-lived assets.

We derive many of our forward-looking statements from our operating budgets and forecasts, which are based upon many detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and it is impossible for us to anticipate all factors that could affect our actual results. For the discussion of these risks and other risks and uncertainties that could cause actual results to differ materially from those contained in our forward-looking statements, please refer to “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended February 2, 2013 ("Annual Report"), filed with the Securities and Exchange Commission (“SEC”) on April 2, 2013. The forward-looking statements included in this Quarterly Report are made only as of the date hereof. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events, or otherwise, except as otherwise required by law.


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INDEX

 
 
 
PART I
 
 
 
ITEM 1.
 
 
 
ITEM 2.
 
 
 
ITEM 3.
 
 
 
ITEM 4.
 
 
 
PART II
 
 
 
ITEM 1.
 
 
 
ITEM 1A.
 
 
 
ITEM 2.
 
 
 
ITEM 3.
 
 
 
ITEM 4.
 
 
 
ITEM 5.
 
 
 
ITEM 6.




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PART I – FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS.

EXPRESS, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in Thousands, Except Per Share Amounts)
(Unaudited)
 
August 3, 2013
 
February 2, 2013
ASSETS
 
 
 
CURRENT ASSETS:
 
 
 
Cash and cash equivalents
$
234,250

 
$
256,297

Receivables, net
13,510

 
11,024

Inventories
241,933

 
215,082

Prepaid minimum rent
26,030

 
25,166

Other
32,172

 
8,293

Total current assets
547,895

 
515,862

 
 
 
 
PROPERTY AND EQUIPMENT
686,777

 
625,344

Less: accumulated depreciation
(364,576
)
 
(346,975
)
Property and equipment, net
322,201

 
278,369

 
 
 
 
TRADENAME/DOMAIN NAME
197,787

 
197,719

DEFERRED TAX ASSETS
16,808

 
16,808

OTHER ASSETS
9,100

 
10,441

Total assets
$
1,093,791

 
$
1,019,199

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
CURRENT LIABILITIES:
 
 
 
Accounts payable
$
197,050

 
$
176,125

Deferred revenue
19,459

 
27,851

Accrued bonus
893

 
336

Accrued expenses
84,197

 
108,464

Total current liabilities
301,599

 
312,776

 
 
 
 
LONG-TERM DEBT
199,003

 
198,843

OTHER LONG-TERM LIABILITIES
174,928

 
136,418

Total liabilities
675,530

 
648,037

 
 
 
 
COMMITMENTS AND CONTINGENCIES (Note 12)

 

 
 
 
 
STOCKHOLDERS’ EQUITY:
 
 
 
Preferred stock – $0.01 par value; 10,000 shares authorized; no shares issued or outstanding

 

Common stock – $0.01 par value; 500,000 shares authorized; 89,701 shares and 89,322 shares issued at August 3, 2013 and February 2, 2013, respectively, and 84,866 shares and 85,224 shares outstanding at August 3, 2013 and February 2, 2013, respectively
897

 
893

Additional paid-in capital
118,301

 
105,012

Accumulated other comprehensive gain (loss)
196

 
(20
)
Retained earnings
381,267

 
331,921

Treasury stock – at average cost; 4,835 shares and 4,098 shares at August 3, 2013 and February 2, 2013, respectively
(82,400
)
 
(66,644
)
Total stockholders’ equity
418,261

 
371,162

Total liabilities and stockholders’ equity
$
1,093,791

 
$
1,019,199

See notes to unaudited consolidated financial statements.

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EXPRESS, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Amounts in Thousands, Except Per Share Amounts)
(Unaudited)

 
Thirteen Weeks Ended
 
Twenty-Six Weeks Ended
 
August 3,
2013
 
July 28,
2012
 
August 3,
2013
 
July 28,
2012
NET SALES
$
486,158

 
$
454,879

 
$
994,682


$
950,831

         COST OF GOODS SOLD, BUYING AND OCCUPANCY COSTS
333,611

 
308,358

 
671,358


615,543

Gross profit
152,547

 
146,521

 
323,324


335,288

OPERATING EXPENSES:
 
 
 
 
 


Selling, general, and administrative expenses
119,176

 
115,307

 
231,799


229,502

Other operating (income) expense, net
(44
)
 
18

 
(584
)

33

Total operating expenses
119,132

 
115,325

 
231,215


229,535

 
 
 
 
 
 


OPERATING INCOME
33,415

 
31,196

 
92,109


105,753

 
 
 
 
 
 


INTEREST EXPENSE, NET
4,776

 
4,773

 
9,581


9,555

OTHER EXPENSE, NET
576

 
220

 
805


12

INCOME BEFORE INCOME TAXES
28,063

 
26,203

 
81,723


96,186

INCOME TAX EXPENSE
11,154

 
10,374

 
32,377


38,284

NET INCOME
$
16,909

 
$
15,829

 
$
49,346


$
57,902

 
 
 
 
 
 


OTHER COMPREHENSIVE INCOME:
 
 
 
 
 


Foreign currency translation gain
146

 
81

 
216


3

COMPREHENSIVE INCOME
$
17,055

 
$
15,910

 
$
49,562


$
57,905

 
 
 
 
 
 
 
 
EARNINGS PER SHARE:
 
 
 
 



Basic
$
0.20

 
$
0.18

 
$
0.58


$
0.66

Diluted
$
0.20

 
$
0.18

 
$
0.58


$
0.65

 
 
 
 
 



WEIGHTED AVERAGE SHARES OUTSTANDING:
 
 
 
 



Basic
85,001

 
87,640

 
85,048


88,243

Diluted
85,572


87,979

 
85,531


88,645

See notes to unaudited consolidated financial statements.

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EXPRESS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in Thousands)
(Unaudited)

 
Twenty-Six Weeks Ended
 
August 3, 2013
 
July 28, 2012
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
49,346


$
57,902

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
Depreciation and amortization
34,754


33,937

Loss on disposal of property and equipment
286


35

Excess tax benefit from share-based compensation
(64
)

(277
)
Share-based compensation
10,837


8,856

Deferred taxes


(188
)
Changes in operating assets and liabilities:
 

 
Receivables, net
(2,408
)

(4,802
)
Inventories
(27,103
)

(204
)
Accounts payable, deferred revenue, and accrued expenses
(20,533
)

(25,982
)
Other assets and liabilities
(8,582
)

5,005

Net cash provided by operating activities
36,533


74,282

 



CASH FLOWS FROM INVESTING ACTIVITIES:



Capital expenditures
(45,538
)

(45,661
)
Purchase of intangible assets
(69
)

(185
)
Net cash used in investing activities
(45,607
)

(45,846
)
 



CASH FLOWS FROM FINANCING ACTIVITIES:
 


Payments on capital lease obligation
(29
)

(27
)
Excess tax benefit from share-based compensation
64


277

Proceeds from share-based compensation
2,828


623

Repurchase of common stock
(15,756
)

(51,497
)
Net cash used in financing activities
(12,893
)

(50,624
)
 





EFFECT OF EXCHANGE RATE ON CASH
(80
)


 





NET DECREASE IN CASH AND CASH EQUIVALENTS
(22,047
)
 
(22,188
)
CASH AND CASH EQUIVALENTS, Beginning of period
256,297


152,362

CASH AND CASH EQUIVALENTS, End of period
$
234,250


$
130,174

 
 
 
 
See notes to unaudited consolidated financial statements.

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Notes to Unaudited Consolidated Financial Statements
(unaudited)

1. Description of Business and Basis of Presentation
Business Description

Express, Inc., together with its subsidiaries ("Express" or the "Company"), is a specialty apparel and accessories retailer of women's and men's merchandise, targeting the 20 to 30 year old customer. Express merchandise is sold through retail stores and the Company's website, www.express.com. As of August 3, 2013, Express operated 621 primarily mall-based stores in the United States, Canada, and Puerto Rico. Additionally, the Company earned revenue from 20 franchise stores. These franchise stores are operated by franchisees pursuant to franchise agreements covering the Middle East and Latin America. Under the franchise agreements, the franchisees operate stores that sell Express-branded apparel and accessories purchased directly from the Company.

Fiscal Year

The Company's fiscal year ends on the Saturday closest to January 31. Fiscal years are referred to by the calendar year in which the fiscal year commences. References herein to "2013" and "2012" represent the 52-week period ended February 1, 2014 and the 53-week period ended February 2, 2013, respectively. All references herein to “the second quarter of 2013” and “the second quarter of 2012” represent the thirteen weeks ended August 3, 2013 and July 28, 2012, respectively.

Basis of Presentation

The accompanying unaudited Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, the accompanying unaudited Consolidated Financial Statements reflect all adjustments (which are of a normal recurring nature) necessary to state fairly the financial position, results of operations, and cash flows for the interim periods, but are not necessarily indicative of the results of operations to be anticipated for 2013. Therefore, these statements should be read in conjunction with the Consolidated Financial Statements and Notes thereto for the year ended February 2, 2013, included in the Company's Annual Report on Form 10-K, filed with the SEC on April 2, 2013.

Principles of Consolidation

The unaudited Consolidated Financial Statements include the accounts of Express, Inc. and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.

Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the Consolidated Financial Statements and the reported amounts of revenues and expenses during the reporting period, as well as the related disclosure of contingent assets and liabilities as of the date of the Consolidated Financial Statements. Actual results may differ from those estimates. The Company revises its estimates and assumptions as new information becomes available.

Reclassifications

Certain prior period amounts have been reclassified or adjusted to conform to the current year presentation.

2. Segment Reporting
The Company defines an operating segment on the same basis that it uses to evaluate performance internally. The Company has determined that, together, its Chief Executive Officer and its Chief Operating Officer are the Chief Operating Decision Maker and that there is one operating segment. Therefore, the Company reports results as a single segment, which includes the operation of its Express brick-and-mortar retail stores, e-commerce operations, and franchise operations.
 

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The following is information regarding the Company's sales channels:
 
Thirteen Weeks Ended
 
Twenty-Six Weeks Ended
 
August 3, 2013
 
July 28, 2012
 
August 3, 2013
 
July 28, 2012
 
(in thousands)
 
(in thousands)
Stores
$
419,175

 
$
403,179

 
$
849,732

 
$
846,625

E-commerce
59,885

 
47,192

 
130,607

 
95,068

Other revenue
7,098

 
4,508

 
14,343

 
9,138

Total net sales
$
486,158

 
$
454,879

 
$
994,682

 
$
950,831

Other revenue consists primarily of shipping and handling revenue related to e-commerce activity, revenue from franchise agreements, and gift card breakage.
Revenues and long-lived assets relating to the Company's international operations were not material for any period presented and are, therefore, not reported separately from domestic revenues or long-lived assets.

3. Earnings Per Share
The following table provides a reconciliation between basic and diluted weighted-average shares used to calculate basic and diluted earnings per share:
 
Thirteen Weeks Ended
 
Twenty-Six Weeks Ended
 
August 3, 2013
 
July 28, 2012
 
August 3, 2013
 
July 28, 2012
 
(in thousands)
Weighted-average shares - basic
85,001

 
87,640

 
85,048

 
88,243

Dilutive effect of stock options, restricted stock units, and restricted stock
571

 
339

 
483

 
402

Weighted-average shares - diluted
85,572

 
87,979

 
85,531

 
88,645







Equity awards representing 2.1 million and 2.0 million shares of common stock were excluded from the computation of diluted earnings per share for the thirteen and twenty-six weeks ended August 3, 2013, respectively, as the effects of the awards would have been anti-dilutive. Equity awards representing 2.6 million and 2.3 million shares of common stock were excluded from the computation of diluted earnings per share for the thirteen and twenty-six weeks ended July 28, 2012, respectively, as the effects of the awards would have been anti-dilutive.

Additionally, for the thirteen and twenty-six weeks ended August 3, 2013, there were 0.5 million shares, and for the thirteen and twenty-six weeks ended July 28, 2012, 0.3 million shares, of restricted stock excluded from the computation of diluted weighted average shares because the number of shares that will ultimately be issued is contingent on the Company's performance compared to pre-established annual performance goals.
4. Share Repurchase Program
On May 24, 2012, the Company's Board of Directors (the "Board") authorized the repurchase of up to $100.0 million of the Company's common stock (the "Repurchase Program"), which may be made from time to time in open market or privately negotiated transactions. The Repurchase Program may be suspended, modified, or discontinued at any time, and the Company has no obligation to make repurchases of its common stock under the Repurchase Program. During the thirteen and twenty-six weeks ended August 3, 2013, the Company repurchased 0.6 million shares of its common stock under the Repurchase Program for a total of $13.9 million, including commissions. During the thirteen and twenty-six week periods ended July 28, 2012, the Company repurchased 2.7 million shares of its common stock under the Repurchase Program for a total of $50.1 million, including commissions. Subsequent to the second quarter, the Company completed its Repurchase Program by repurchasing 1.0 million shares of its common stock for a total of $21.2 million.

5. Fair Value of Financial Assets
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Assets and liabilities measured at fair value are classified using the following hierarchy, which is based upon the transparency of inputs to the valuation as of the measurement date.


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Level 1-Valuation is based upon quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2-Valuation is based upon quoted prices for similar assets and liabilities in active markets or other inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

Level 3-Valuation is based upon other unobservable inputs that are significant to the fair value measurement.
The following table presents the Company's assets measured at fair value on a recurring basis as of August 3, 2013 and February 2, 2013, aggregated by the level in the fair value hierarchy within which those measurements fall.
 
 
August 3, 2013
 
Level 1
Level 2
Level 3
 
(in thousands)
U.S. treasury securities money market funds
$
209,154

$

$

 
 
 
February 2, 2013
 
Level 1
Level 2
Level 3
 
(in thousands)
U.S. treasury securities money market funds
$
236,086

$

$

The carrying amounts reflected on the unaudited Consolidated Balance Sheets for cash, cash equivalents, receivables, prepaid expenses, and payables as of August 3, 2013 and February 2, 2013 approximated their fair values.

6. Intangible Assets
The following table provides the significant components of intangible assets:
 
August 3, 2013
 
Cost
 
Accumulated
Amortization 
 
Ending Net Balance
 
(in thousands)
Tradename
$
196,144

 
$

 
$
196,144

Internet domain name/trademark
1,643

 

 
1,643

Net favorable lease obligations/other
20,175

 
18,471

 
1,704

 
$
217,962

 
$
18,471

 
$
199,491


 
February 2, 2013
 
Cost
 
Accumulated
Amortization 
 
Ending Net Balance
 
(in thousands)
Tradename
$
196,144

 
$

 
$
196,144

Internet domain name/trademark
1,575

 

 
1,575

Net favorable lease obligations/other
19,750

 
17,811

 
1,939

 
$
217,469

 
$
17,811

 
$
199,658

The Company's tradename, internet domain name and trademark have indefinite lives. Net favorable lease obligations and other intangibles are amortized over a period between 5 and 9 years and are included in other assets on the unaudited Consolidated Balance Sheets. Amortization expense totaled $0.4 million and $0.7 million during the thirteen and twenty-six weeks ended August 3, 2013, respectively; and $0.4 million and $0.8 million during the thirteen and twenty-six weeks ended July 28, 2012, respectively.


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7. Related Party Transactions
The transactions described in this note are transactions between the Company and entities affiliated with Golden Gate Private Equity, Inc. ("Golden Gate"). Prior to July 2007, the Company operated as a division of L Brands, Inc. ("L Brands"). In July 2007, a Golden Gate affiliate acquired approximately 75% of the outstanding equity interests in the Company from L Brands, and the Company began its transition to a stand-alone company. In May 2010, the Company completed an initial public offering ("IPO") whereby Golden Gate and L Brands sold a portion of their shares. Following the IPO, both Golden Gate and L Brands gradually reduced their ownership interest in the Company. On July 29, 2011, L Brands disposed of its remaining ownership interest in the Company and, as a result of this disposition, ceased to be a related party as of the end of the second quarter of 2011. On March 19, 2012, Golden Gate sold its remaining ownership interest in the Company and, as of May 31, 2012, Golden Gate no longer had representation on the Board. As a result, Golden Gate ceased to be a related party as of June 1, 2012. The related party activity with Golden Gate affiliates described in this note includes only expenses incurred and income earned through the date which Golden Gate ceased to be a related party.

Transactions with Other Golden Gate Affiliates
The Company transacts with Golden Gate affiliates for e-commerce warehouse and fulfillment services, software license purchases, and consulting and software maintenance services.
The Company incurred the following charges from Golden Gate affiliates for various services, which are included primarily in cost of goods sold, buying and occupancy costs in the unaudited Consolidated Statements of Income and Comprehensive Income:
 
Thirteen Weeks Ended
 
Twenty-Six Weeks Ended
 
July 28, 2012
 
July 28, 2012
 
(in thousands)
E-commerce warehouse and fulfillment
$
2,005

 
$
8,755

Software licenses and consulting and software maintenance services
$
51

 
$
91

The Company provides real estate services to certain Golden Gate affiliates. Income recognized during the thirteen and twenty-six weeks ended July 28, 2012 was nominal and $0.2 million, respectively.

Interest expense incurred on the 8 3/4% Senior Notes attributable to the $40.0 million of Senior Notes previously owned by a Golden Gate affiliate was $0.1 million and $0.3 million during the thirteen and twenty-six weeks ended July 28, 2012.

8. Income Taxes
 
The provision for income taxes is based on a current estimate of the annual effective tax rate adjusted to reflect the impact of discrete items. The Company's quarterly effective tax rate does not reflect a benefit associated with losses related to certain foreign subsidiaries and foreign tax credit carryovers. The Company's effective tax rate was 39.7% and 39.6% for the thirteen weeks ended August 3, 2013 and July 28, 2012, respectively. The Company's effective tax rate was 39.6% and 39.8% for the twenty-six weeks ended August 3, 2013 and July 28, 2012, respectively.
9. Lease Financing Obligations

In certain lease arrangements, the Company is involved in the construction of the building. To the extent the Company is involved in the construction of structural improvements or takes construction risk prior to commencement of a lease, it is deemed the owner of the project for accounting purposes. Therefore, the Company records an asset in property and equipment on the unaudited Consolidated Balance Sheets, including any capitalized interest costs, and related liabilities in accrued interest and lease financing obligation in other long-term liabilities on the unaudited Consolidated Balance Sheets, for the replacement cost of the Company's portion of the pre-existing building plus the amount of construction-in-progress incurred by the landlord as of the balance sheet date. Once construction is complete, the Company considers the requirements for sale-leaseback treatment, including the transfer of all risks of ownership back to the landlord, and whether the Company has any continuing involvement in the leased property. If the arrangement does not qualify for sale-leaseback treatment, the building assets subject to these obligations remain on the Company's unaudited Consolidated Balance Sheets at their historical cost, and such assets are depreciated over their remaining useful lives. The replacement cost of the pre-existing building, as well as the costs of construction paid by the landlord, are recorded as lease financing obligations, and a portion of the lease payments are applied as payments of principal and interest. The interest rate selected for lease financing obligations is evaluated at lease inception based

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on the Company's incremental borrowing rate. At the end of the initial lease term, should the Company decide not to renew the lease, the Company would reverse equal amounts of the net book value of the assets and the corresponding lease financing obligations. The initial lease terms related to these lease arrangements are expected to expire in 2023 and 2029. As of August 3, 2013 and February 2, 2013, the Company has recorded $39.7 million and $16.2 million, respectively, of capitalized interest and landlord funded construction-in-progress, with a corresponding amount to lease financing obligations, each of which is reflected in the unaudited Consolidated Balance Sheets. These assets and liabilities are classified as non-cash items for purposes of the unaudited Consolidated Statements of Cash Flow.

Rent expense relating to the land is recognized on a straight-line basis once construction begins. Once the store opens, the Company will not report rent expense for the portion of the rent payment determined to be related to the lease obligations which are owned for accounting purposes. Rather, this portion of rent payment under the lease will be recognized as a reduction of the lease financing obligations and as interest expense.

10. Debt
Borrowings outstanding consisted of the following:
 
 
August 3, 2013
 
February 2, 2013
 
(in thousands)
8 3/4% Senior Notes
$
200,850

 
$
200,850

Debt discount on Senior Notes
(1,847
)
 
(2,007
)
Total long-term debt
$
199,003

 
$
198,843


Revolving Credit Facility

On July 29, 2011, Express Holding, LLC, a wholly-owned subsidiary ("Express Holding"), and its subsidiaries entered into an Amended and Restated $200.0 million secured Asset-Based Credit Facility ("Revolving Credit Facility"). As of August 3, 2013, there were no borrowings outstanding and approximately $197.4 million available under the the Revolving Credit Facility.

The Revolving Credit Facility requires Express Holding and its subsidiaries to maintain a fixed charge coverage ratio of at least 1.0:1.0 if excess availability plus eligible cash collateral is less than 10% of the borrowing base for 15 consecutive days. In addition, the Revolving Credit Facility contains customary covenants and restrictions on Express Holding and its subsidiaries' activities, including, but not limited to, limitations on the incurrence of additional indebtedness; liens, negative pledges, guarantees, investments, loans, asset sales, mergers, acquisitions, and prepayment of other debt; distributions, dividends, and the repurchase of capital stock; transactions with affiliates; and the ability to change the nature of its business or its fiscal year. All obligations under the Revolving Credit Facility are guaranteed by Express Holding and its domestic subsidiaries (that are not borrowers) and secured by a lien on substantially all of the assets of Express Holding and its domestic subsidiaries.
Senior Notes

On March 5, 2010, Express, LLC and Express Finance Corp. ("Express Finance"), wholly-owned subsidiaries of the Company, co-issued, in a private placement, $250.0 million of 8 3/4% Senior Notes due in 2018 (the "Senior Notes") at an offering price of 98.6% of the face value.

Prior to March 1, 2014, the Senior Notes may be redeemed in part or in full at a redemption price equal to the principal amount plus a make-whole premium, calculated in accordance with the indenture governing the Senior Notes, and accrued and unpaid interest. On or after March 1, 2014, the Senior Notes may be redeemed in part or in full at the following percentages of the outstanding principal amount prepaid: 104.38% prior to March 1, 2015; 102.19% on or after March 1, 2015, but prior to March 1, 2016; and at the principal amount on or after March 1, 2016.

The indenture governing the Senior Notes contains customary covenants and restrictions on the activities of Express, LLC, Express Finance, and Express, LLC's restricted subsidiaries, including, but not limited to, the incurrence of additional indebtedness; payment of dividends or distributions in respect of capital stock or certain other restricted payments or investments; entering into agreements that restrict distributions from restricted subsidiaries; the sale or disposal of assets, including capital stock of restricted subsidiaries; transactions with affiliates; the incurrence of liens; and mergers, consolidations or the sale of substantially all of Express, LLC's assets. Certain of these covenants will be suspended if the Senior Notes are assigned an investment grade rating by both Standard & Poor's and Moody's Investors Service and no default has occurred or is continuing. If either rating on the Senior Notes should subsequently decline to below investment grade, the suspended covenants will be reinstated.

11

Table of Contents

Fair Value of Debt
The fair value of the Senior Notes was estimated using a number of factors, such as recent trade activity, size, timing, and yields of comparable bonds and is, therefore, within Level 2 of the fair value hierarchy. As of August 3, 2013, the estimated fair value of the Senior Notes was $214.8 million.
Letters of Credit
The Company may enter into various trade letters of credit ("trade LCs") in favor of certain vendors to secure merchandise. These trade LCs are issued for a defined period of time, for specific shipments, and generally expire 3 weeks after the merchandise shipment date. As of August 3, 2013 and February 2, 2013, there were no outstanding trade LCs. Additionally, the Company enters into stand-by letters of credit ("stand-by LCs") on an as-needed basis to secure merchandise and fund other general and administrative costs. As of August 3, 2013 and February 2, 2013, outstanding stand-by LCs totaled $2.6 million and $2.1 million, respectively.

11. Share-Based Compensation

The Company records the fair value of share-based payments to employees in the unaudited Consolidated Statements of Income and Comprehensive Income as compensation expense, net of forfeitures, over the requisite service period.

Share-Based Compensation Plans

The following summarizes our share-based compensation expense:
 
Thirteen Weeks Ended
 
Twenty-Six Weeks Ended
 
August 3, 2013
 
July 28, 2012
 
August 3, 2013
 
July 28, 2012
 
(in thousands)
Restricted stock units and restricted stock
$
3,531

 
$
2,159

 
$
6,309

 
$
4,057

Stock options
2,295

 
2,838

 
4,527

 
4,786

Restricted shares (equity issued pre-IPO)

 
3

 
1

 
13

Total share-based compensation
$
5,826

 
$
5,000

 
$
10,837

 
$
8,856


The stock compensation related income tax benefit recognized by the Company during the thirteen and twenty-six weeks ended August 3, 2013 was $0.3 million and $2.2 million, respectively. The stock compensation-related income tax benefit recognized by the Company during the thirteen and twenty-six weeks ended July 28, 2012 was zero and $1.5 million, respectively.

Stock Options

During the twenty-six weeks ended August 3, 2013, the Company granted stock options under the Amended and Restated Express, Inc. 2010 Incentive Compensation Plan (the "2010 Plan"). The fair value of the stock options is determined using the Black-Scholes-Merton option-pricing model as described later in this note. The majority of stock options granted under the 2010 Plan vest 25% per year over 4 years and have a 10 year contractual life; however, those granted to the Chief Executive Officer vest ratably over 3 years. The expense for stock options is recognized using the straight-line attribution method.

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The Company's activity with respect to stock options during the twenty-six weeks ended August 3, 2013 was as follows:
 
 
Number of
Shares 
 
Grant Date
Weighted Average
Exercise Price
 
Weighted-Average Remaining Contractual Life
 
Aggregate Intrinsic Value
 
(in thousands, except per share amounts and years)
Outstanding, February 2, 2013
3,092

 
$
18.99

 
 
 
 
Granted
612

 
$
17.49

 
 
 
 
Exercised
(162
)
 
$
17.26

 
 
 
 
Forfeited or expired
(129
)
 
$
19.24

 
 
 
 
Outstanding, August 3, 2013
3,413

 
$
18.79

 
7.9
 
$
14,995

Expected to vest at August 3, 2013
1,797

 
$
19.10

 
8.4
 
$
7,528

Exercisable at August 3, 2013
1,555

 
$
18.43

 
7.3
 
$
7,192

The following provides additional information regarding the Company's stock options:
 
Twenty-Six Weeks Ended
 
August 3, 2013

July 28, 2012
 
(in thousands, except per share amounts)
Weighted average grant date fair value of options granted
$
9.27

 
$
13.43

Total intrinsic value of options exercised
$
496

 
$
267

As of August 3, 2013, there was approximately $14.8 million of total unrecognized compensation expense related to stock options, which is expected to be recognized over a weighted-average period of approximately 1.6 years.
The Company uses the Black-Scholes-Merton option-pricing model to value stock options granted to employees and directors. The Company's determination of the fair value of stock options is affected by the Company's stock price as well as a number of subjective and complex assumptions. These assumptions include the risk-free interest rate, the Company's expected stock price volatility over the term of the awards, expected term of the award, and dividend yield.
The following assumptions were used in estimating the fair value of the stock options on the date of the grant:

 
Twenty-Six Weeks Ended
 
August 3, 2013
 
July 28, 2012
Risk-free interest rate (1)
1.06
%
 
1.14
%
Price Volatility (2)
56.0
%
 
55.9
%
Expected term (years) (3)
6.19

 
6.16

Dividend yield (4)

 


(1)
Represents the yield on U.S. Treasury securities with a term consistent with the expected term of the stock options.
(2)
For the first 2 years following the Company's IPO, this was based on the historical volatility of selected comparable companies over a period consistent with the expected term of the stock options because the Company had a limited history of being publicly traded. Comparable companies were selected primarily based on industry, stage of life cycle, and size. Beginning with the second anniversary of the IPO in May 2012, the Company began using its own volatility as an additional input in the determination of expected volatility.
(3)
Calculated utilizing the “simplified” methodology prescribed by Staff Accounting Bulletin No. 107 due to the lack of historical exercise data necessary to provide a reasonable basis upon which to estimate the term.
(4)
The Company does not currently plan on paying regular dividends.
Restricted Stock Units and Restricted Stock
During the twenty-six weeks ended August 3, 2013, the Company granted restricted stock units (“RSUs”) under the 2010 Plan, including 0.5 million RSUs with performance conditions. The fair value of the RSUs is determined based on the Company's stock price on the grant date. The expense for RSUs is recognized using the straight-line attribution method, except for RSUs with performance conditions, for which the graded vesting method is used. The RSUs with performance conditions are also

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subject to time-based vesting with requisite service periods of 2 years for the Chief Executive Officer and 3 years for other employees. RSUs without performance conditions vest ratably over 4 years.

The Company's activity with respect to RSUs and restricted stock for the twenty-six weeks ended August 3, 2013 was as follows:
 
 
Number of
Shares 
Grant Date
Weighted Average
Fair Value 
 
(in thousands, except per share amounts)
Unvested, February 2, 2013
1,218

$
21.49

Granted
886

$
17.66

Vested
(288
)
$
20.74

Forfeited
(105
)
$
20.53

Unvested, August 3, 2013
1,711

$
19.09

The total fair value/intrinsic value of RSUs and restricted stock that vested was $6.0 million during the twenty-six weeks ended August 3, 2013. As of August 3, 2013, there was approximately $22.5 million of total unrecognized compensation expense related to unvested RSUs and restricted stock, which is expected to be recognized over a weighted-average period of approximately 1.7 years.

12. Commitments and Contingencies

In a complaint filed on July 7, 2011 in the United States District Court for the Northern District of Illinois styled as Eric Wynn, et al., v. Express, LLC, Express was named as a defendant in a purported nationwide collective action alleging violations of the Fair Labor Standards Act and of applicable Illinois state wage and hour statutes related to alleged off-the-clock work. The lawsuit sought unspecified monetary damages and attorneys' fees. In March 2012, the court granted conditional collective action certification.

To avoid the expense and uncertainty of further litigation with respect to this matter, in January 2013, the Company entered into a settlement agreement to resolve all wage and hour claims that were asserted or could have been asserted by the plaintiffs and other similarly situated employees and former employees who opted-in to the collective action. The settlement was subsequently approved by the court in the first quarter of 2013.

Pursuant to the terms of the approved settlement, the Company paid out $0.4 million in the aggregate to (i) plaintiffs and other employees and former employees who opted-in to the collective action, and (ii) certain legal fees and expenses on behalf of the plaintiffs and other employees and former employees who opted-in to the collective action. All amounts owed by the Company pursuant to the settlement agreement have been paid in full and this matter is now resolved.

From time to time the Company is subject to various claims and contingencies arising out of the normal course of business. Management believes that the ultimate liability arising from such claims and contingencies, if any, is not likely to have a material adverse effect on the Company's results of operations, financial condition, or cash flows.


13. Guarantor Subsidiaries
On March 5, 2010, Express, LLC and Express Finance (the “Subsidiary Issuers”), both wholly-owned indirect subsidiaries of Express, Inc., issued the Senior Notes. Express, Inc. (“Guarantor”) and certain of its indirect 100% owned subsidiaries (“Guarantor Subsidiaries”) have guaranteed, on a joint and several basis, the obligations under the Senior Notes. The guarantees are not full and unconditional because Guarantor Subsidiaries can be released and relieved of their obligations under certain customary circumstances contained in the indenture governing the Senior Notes. These circumstances include the following, so long as other applicable provisions of the indenture are adhered to: any sale or other disposition of all or substantially all of the assets of any Guarantor Subsidiary, any sale or other disposition of capital stock of any Guarantor Subsidiary, or designation of any restricted subsidiary that is a Guarantor Subsidiary as an unrestricted subsidiary. On August 26, 2012, Express, LLC contributed certain assets and liabilities to a newly created Guarantor Subsidiary. As a result, prior period condensed consolidating financial information has been revised to retroactively give effect to the new structure in place as of August 26, 2012.

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Table of Contents


In the Condensed Consolidating Statements of Income and Comprehensive Income for the thirteen weeks ended April 28, 2012, as presented in the Company's Quarterly Report on Form 10-Q for the quarterly period ended May 4, 2013, and for the fifty-three weeks ended February 2, 2013, as presented in the Company's Annual Report on Form 10-K for the year ended February 2, 2013, Income tax expense (benefit) was improperly presented for the Subsidiary Issuers and the Guarantor Subsidiaries by $38.9 million and $18.0 million, respectively. There was no impact on the consolidated balance sheets, statements of income and comprehensive income, or statements of cash flows. The corrected amounts are presented in the following tables:
 
Subsidiary Issuers
 
Thirteen weeks ended April 28, 2012
Fifty-three weeks ended February 2, 2013
(Income) loss in subsidiary
(12,131)
(52,195)
Income (loss) before income taxes
61,873
197,019
Income tax expense (benefit)
19,530
57,284
 
Guarantor Subsidiaries
 
Thirteen weeks ended April 28, 2012
Fifty-three weeks ended February 2, 2013
Income tax expense (benefit)
8,380
35,649
Net income (loss)
12,368
53,741

In addition, the Condensed Consolidating Balance Sheet as of February 2, 2013, presented herein, has been revised to reflect the impact of the changes previously discussed. The corrections made are as follows:
 
February 2, 2013
 
Subsidiary Issuers
Guarantor Subsidiaries
Consolidating Adjustments
Change to Investment in subsidiary
(17,987)
17,987
Change to Total Assets
(17,987)
17,987
Change to Accrued expenses
(17,987)
17,987
Change to Total Liabilities
(17,987)
17,987
Change to Total stockholders' equity
(17,987)
17,987

In accordance with accounting guidance found in ASC 250-10, the Company assessed the materiality of the errors and concluded they were not material to the Company's previously issued financial statements. As a result, the Company has corrected the error by revising the Condensed Consolidating Statement of Income for the twenty-six weeks ended July 28, 2012 contained herein and will revise the Condensed Consolidating Statement of Income for the fifty-three week period ended February 2, 2013 in the Annual Report on Form 10-K for the year ended February 1, 2014.
The following consolidating schedules present the condensed financial information on a combined basis.

15

Table of Contents

EXPRESS, INC.
CONDENSED CONSOLIDATING BALANCE SHEET
(Amounts in thousands)
(Unaudited)

 
August 3, 2013
 
Express, Inc.
 
Subsidiary
Issuers
 
Guarantor
Subsidiaries
 
Other
Subsidiaries
 
Consolidating Adjustments
 
Consolidated
Total
Assets
 
 
 
 
 
 
 
 
 
 
 
Current assets
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
1,865

 
$
207,858

 
$
22,376

 
$
2,151

 
$

 
$
234,250

Receivables, net

 
7,869

 
4,376

 
1,265

 

 
13,510

Inventories

 
17,134

 
220,833

 
3,966

 

 
241,933

Prepaid minimum rent

 
680

 
24,259

 
1,091

 

 
26,030

Intercompany loan receivable

 
21,993

 

 

 
(21,993
)
 

Intercompany receivable

 

 
80,552

 
5,783

 
(86,335
)
 

Other
479

 
67,607

 
3,222

 
91

 
(39,227
)
 
32,172

Total current assets
2,344

 
323,141

 
355,618

 
14,347

 
(147,555
)
 
547,895

Property and equipment, net

 
39,425

 
266,287

 
16,489

 

 
322,201

Tradename/domain name

 
197,787

 

 

 

 
197,787

Investment in subsidiary
415,179

 
379,186

 

 
409,396

 
(1,203,761
)
 

Deferred tax assets
738

 
10,369

 
5,701

 

 

 
16,808

Other assets

 
7,030

 
2,064

 
6

 

 
9,100

Total assets
$
418,261

 
$
956,938

 
$
629,670

 
$
440,238

 
$
(1,351,316
)
 
$
1,093,791

Liabilities and stockholders’ equity

 

 

 

 

 
 
Current liabilities

 

 

 

 

 
 
Accounts payable
$

 
$
193,892

 
$
2,430

 
$
728

 
$

 
$
197,050

Deferred revenue

 
1,113

 
18,242

 
104

 

 
19,459

Accrued bonus

 

 
878

 
15

 

 
893

Accrued expenses

 
36,709

 
85,563

 
1,152

 
(39,227
)
 
84,197

Intercompany payable

 
86,335

 

 

 
(86,335
)
 

Intercompany loan payable

 

 

 
21,993

 
(21,993
)
 

Total current liabilities

 
318,049

 
107,113

 
23,992

 
(147,555
)
 
301,599

Long-term debt

 
199,003

 

 

 

 
199,003

Other long-term liabilities

 
30,490

 
138,501

 
5,937

 

 
174,928

Total liabilities

 
547,542

 
245,614

 
29,929

 
(147,555
)
 
675,530

Commitments and Contingencies (Note 12)

 

 

 

 

 

Total stockholders’ equity
418,261

 
409,396

 
384,056

 
410,309

 
(1,203,761
)
 
418,261

Total liabilities and stockholders’ equity
$
418,261

 
$
956,938

 
$
629,670

 
$
440,238

 
$
(1,351,316
)
 
$
1,093,791










16

Table of Contents

EXPRESS, INC.
CONDENSED CONSOLIDATING BALANCE SHEET
(Amounts in thousands)
(Unaudited)

 
February 2, 2013
 
Express, Inc.
 
Subsidiary
Issuers
 
Guarantor
Subsidiaries
 
Other
Subsidiaries
 
Consolidating Adjustments
 
Consolidated
Total
Assets
 
 
 
 
 
 
 
 
 
 
 
Current assets
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
938

 
$
230,174

 
$
22,924

 
$
2,261

 
$

 
$
256,297

Receivables, net

 
5,612

 
3,147

 
2,265

 

 
11,024

Inventories

 
13,597

 
198,094

 
3,391

 

 
215,082

Prepaid minimum rent

 
451

 
23,697

 
1,018

 

 
25,166

Intercompany loan receivable

 
20,754

 

 

 
(20,754
)
 

Intercompany receivable

 

 
98,304

 
5,783

 
(104,087
)
 

Other

 
5,085

 
3,162

 
46

 

 
8,293

Total current assets
938

 
275,673

 
349,328

 
14,764

 
(124,841
)
 
515,862

Property and equipment, net

 
46,913

 
215,829

 
15,627

 

 
278,369

Tradename/domain name

 
197,719

 

 

 

 
197,719

Investment in subsidiary
369,140

 
353,097

 

 
363,356

 
(1,085,593
)
 

Deferred tax assets
738

 
10,369

 
5,701

 

 

 
16,808

Other assets

 
7,710

 
2,727

 
4

 

 
10,441

Total assets
$
370,816

 
$
891,481

 
$
573,585

 
$
393,751

 
$
(1,210,434
)
 
$
1,019,199

Liabilities and stockholders’ equity
 
 
 
 
 
 
 
 
 
 
 
Current liabilities
 
 
 
 
 
 
 
 
 
 
 
Accounts payable
$

 
$
173,395

 
$
1,132

 
$
1,598

 
$

 
$
176,125

Deferred revenue

 
1,223

 
26,507

 
121

 

 
27,851

Accrued bonus

 

 
334

 
2

 

 
336

Accrued expenses
(346
)
 
16,503

 
90,950

 
1,357

 

 
108,464

Intercompany payable

 
104,087

 

 

 
(104,087
)
 

Intercompany loan payable

 

 

 
20,754

 
(20,754
)
 

Total current liabilities
(346
)
 
295,208

 
118,923

 
23,832

 
(124,841
)
 
312,776

Long-term debt

 
198,843

 

 

 

 
198,843

Other long-term liabilities

 
34,074

 
96,706

 
5,638

 

 
136,418

Total liabilities
(346
)
 
528,125

 
215,629

 
29,470

 
(124,841
)
 
648,037

Commitments and Contingencies (Note 12)

 

 

 

 

 

Total stockholders’ equity
371,162

 
363,356

 
357,956

 
364,281

 
(1,085,593
)
 
371,162

Total liabilities and stockholders’ equity
$
370,816

 
$
891,481

 
$
573,585

 
$
393,751

 
$
(1,210,434
)
 
$
1,019,199


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Table of Contents

EXPRESS, INC.
CONDENSED CONSOLIDATING STATEMENT OF INCOME AND COMPREHENSIVE INCOME
(Amounts in thousands)
(Unaudited)

 
Thirteen Weeks Ended August 3, 2013
 
 
 
Subsidiary
 
Guarantor
 
Other
 
Consolidating
 
Consolidated
 
Express, Inc.
 
Issuers
 
Subsidiaries
 
Subsidiaries
 
Adjustments
 
Total
Net sales
$

 
$
232,015

 
$
471,970

 
$
8,416

 
$
(226,243
)
 
$
486,158

Cost of goods sold, buying and occupancy costs

 
176,963

 
377,517

 
5,378

 
(226,247
)
 
333,611

Gross profit

 
55,052

 
94,453

 
3,038

 
4

 
152,547

Selling, general and administrative expenses
119

 
41,467

 
75,033

 
2,557

 

 
119,176

Other operating (income) expense, net

 

 
(62
)
 
14

 
4

 
(44
)
Operating (loss) income
(119
)
 
13,585

 
19,482

 
467

 

 
33,415

Interest expense, net

 
5,285

 
(520
)
 
11

 

 
4,776

(Income) loss in subsidiary
(16,982
)
 
(12,238
)
 

 
(16,982
)
 
46,202

 

Other expense, net

 

 

 
576

 

 
576

Income (loss) before income taxes
16,863

 
20,538

 
20,002

 
16,862

 
(46,202
)
 
28,063

Income tax (benefit) expense
(46
)
 
3,556

 
7,644

 

 

 
11,154

Net income (loss)
$
16,909

 
$
16,982

 
$
12,358

 
$
16,862

 
$
(46,202
)
 
$
16,909

Foreign currency translation
146

 
146

 

 
292

 
(438
)
 
146

Comprehensive income (loss)
$
17,055

 
$
17,128

 
$
12,358

 
$
17,154

 
$
(46,640
)
 
$
17,055


 
Thirteen Weeks Ended July 28, 2012
 
 
 
Subsidiary
 
Guarantor
 
Other
 
Consolidating
 
Consolidated
 
Express, Inc.
 
Issuers
 
Subsidiaries
 
Subsidiaries
 
Adjustments
 
Total
Net sales
$

 
$
257,675

 
$
451,018

 
$
3,424

 
$
(257,238
)
 
$
454,879

Cost of goods sold, buying and occupancy costs

 
204,572

 
360,263

 
539

 
(257,016
)
 
308,358

Gross profit

 
53,103

 
90,755

 
2,885

 
(222
)
 
146,521

Selling, general and administrative expenses
230

 
41,998

 
71,742

 
1,559

 
(222
)
 
115,307

Other operating (income) expense, net

 
(1,509
)
 
16

 
1,511

 

 
18

Operating (loss) income
(230
)
 
12,614

 
18,997

 
(185
)
 

 
31,196

Interest expense, net

 
4,861

 

 
(88
)
 

 
4,773

(Income) loss in subsidiary
(16,059
)
 
(11,008
)
 

 
(16,059
)
 
43,126

 

Other expense, net

 

 

 
220

 

 
220

Income (loss) before income taxes
15,829

 
18,761

 
18,997

 
15,742

 
(43,126
)
 
26,203

Income tax expense

 
2,702

 
7,672

 

 

 
10,374

Net income (loss)
$
15,829

 
$
16,059

 
$
11,325

 
$
15,742

 
$
(43,126
)
 
$
15,829

Foreign currency translation
81

 
81

 

 
162

 
(243
)
 
81

Comprehensive income (loss)
$
15,910

 
$
16,140

 
$
11,325

 
$
15,904

 
$
(43,369
)
 
$
15,910






18

Table of Contents

EXPRESS, INC.
CONDENSED CONSOLIDATING STATEMENT OF INCOME AND COMPREHENSIVE INCOME
(Amounts in thousands)
(Unaudited)

 
Twenty-Six Weeks Ended August 3, 2013
 
 
 
Subsidiary
 
Guarantor
 
Other
 
Consolidating
 
Consolidated
 
Express, Inc.
 
Issuers
 
Subsidiaries
 
Subsidiaries
 
Adjustments
 
Total
Net sales
$

 
$
460,007

 
$
968,872

 
$
15,278

 
$
(449,475
)
 
$
994,682

Cost of goods sold, buying and occupancy costs

 
328,534

 
782,633

 
9,693

 
(449,502
)
 
671,358

Gross profit

 
131,473

 
186,239

 
5,585

 
27

 
323,324

Selling, general and administrative expenses
231

 
79,761

 
146,837

 
4,969

 
1

 
231,799

Other operating (income) expense, net

 

 
(624
)
 
14

 
26

 
(584
)
Operating (loss) income
(231
)
 
51,712

 
40,026

 
602

 

 
92,109

Interest expense, net

 
10,547

 
(989
)
 
23

 

 
9,581

(Income) loss in subsidiary
(49,487
)
 
(24,852
)
 

 
(49,487
)
 
123,826

 

Other expense, net

 

 

 
805

 

 
805

Income (loss) before income taxes
49,256

 
66,017

 
41,015

 
49,261

 
(123,826
)
 
81,723

Income tax (benefit) expense
(90
)
 
16,530

 
15,937

 

 

 
32,377

Net income (loss)
$
49,346

 
$
49,487

 
$
25,078

 
$
49,261

 
$
(123,826
)
 
$
49,346

Foreign currency translation
216

 
216

 

 
432

 
(648
)
 
216

Comprehensive income (loss)
$
49,562

 
$
49,703

 
$
25,078

 
$
49,693

 
$
(124,474
)
 
$
49,562


 
Twenty-Six Weeks Ended July 28, 2012
 
 
 
Subsidiary
 
Guarantor
 
Other
 
Consolidating
 
Consolidated
 
Express, Inc.
 
Issuers
 
Subsidiaries
 
Subsidiaries
 
Adjustments
 
Total
Net sales
$

 
$
555,724

 
$
943,471

 
$
6,535

 
$
(554,899
)
 
$
950,831

Cost of goods sold, buying and occupancy costs

 
403,567

 
762,305

 
4,235

 
(554,564
)
 
615,543

Gross profit

 
152,157

 
181,166

 
2,300

 
(335
)
 
335,288

Selling, general and administrative expenses
500

 
85,105

 
141,388

 
2,844

 
(335
)
 
229,502

Other operating expense, net

 

 
33

 

 

 
33

Operating (loss) income
(500
)
 
67,052

 
39,745

 
(544
)
 

 
105,753

Interest expense, net

 
9,557

 

 
(2
)
 

 
9,555

(Income) loss in subsidiary
(58,402
)
 
(23,139
)
 

 
(58,402
)
 
139,943

 

Other expense, net

 

 

 
12

 

 
12

Income (loss) before income taxes
57,902

 
80,634

 
39,745

 
57,848

 
(139,943
)
 
96,186

Income tax expense

 
22,232

 
16,052

 

 

 
38,284

Net income (loss)
$
57,902

 
$
58,402

 
$
23,693

 
$
57,848

 
$
(139,943
)
 
$
57,902

Foreign currency translation
3

 
3

 

 
6

 
(9
)
 
3

Comprehensive income (loss)
$
57,905

 
$
58,405

 
$
23,693

 
$
57,854

 
$
(139,952
)
 
$
57,905


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Table of Contents

EXPRESS, INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
(Amounts in thousands)
(Unaudited)

 
Twenty-Six Weeks Ended August 3, 2013
 
 
 
Subsidiary
 
Guarantor
 
Other
 
Consolidating
 
Consolidated
 
Express, Inc.
 
Issuers
 
Subsidiaries
 
Subsidiaries
 
Adjustments
 
Total
Operating Activities
 
 
 
 
 
 
 
 
 
 
 
Net cash provided by (used in) operating activities
$
(827
)
 
$
5,135

 
$
30,253

 
$
1,972

 
$

 
$
36,533

Investing Activities
 
 
 
 
 
 
 
 
 
 
 
Capital expenditures

 
(11,496
)
 
(30,801
)
 
(3,241
)
 

 
(45,538
)
Distributions received
14,682

 

 

 
14,682

 
(29,364
)
 

Purchase of intangible assets

 
(69
)
 

 

 

 
(69
)
Net cash (used in) provided by investing activities
14,682

 
(11,565
)
 
(30,801
)
 
11,441

 
(29,364
)
 
(45,607
)
Financing Activities
 
 
 
 
 
 
 
 
 
 
 
Payments on capital lease obligation

 
(29
)
 

 

 

 
(29
)
Excess tax benefit from share-based compensation

 
64

 

 

 

 
64

Proceeds from share-based compensation
2,828

 

 

 

 

 
2,828

Repurchase of common stock
(15,756
)
 

 

 

 

 
(15,756
)
Repayment of intercompany loan

 
3,875

 

 
(3,875
)
 

 

Borrowings under intercompany loan

 
(5,114
)
 

 
5,114

 

 

Distributions paid

 
(14,682
)
 

 
(14,682
)
 
29,364

 

Net cash (used in) provided by financing activities
(12,928
)
 
(15,886
)
 

 
(13,443
)
 
29,364

 
(12,893
)
 
 
 
 
 
 
 
 
 
 
 
 
Effect of exchange rate on cash

 

 

 
(80
)
 

 
(80
)
 
 
 
 
 
 
 
 
 
 
 
 
Net increase (decrease) in cash and cash equivalents
927

 
(22,316
)
 
(548
)
 
(110
)
 

 
(22,047
)
Cash and cash equivalents, beginning of period
938

 
230,174

 
22,924

 
2,261

 

 
256,297

Cash and cash equivalents, end of period
$
1,865

 
$
207,858

 
$
22,376

 
$
2,151

 
$

 
$
234,250










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Table of Contents



EXPRESS, INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
(Amounts in thousands)
(Unaudited)

 
Twenty-Six Weeks Ended July 28, 2012
 
 
 
Subsidiary
 
Guarantor
 
Other
 
Consolidating
 
Consolidated
 
Express, Inc.
 
Issuers
 
Subsidiaries
 
Subsidiaries
 
Adjustments
 
Total
Operating Activities
 
 
 
 
 
 
 
 
 
 
 
Net cash (used in) provided by operating activities
$
(1,260
)
 
$
50,621

 
$
24,386

 
$
535

 
$

 
$
74,282

Investing Activities
 
 
 
 
 
 
 
 
 
 
 
Capital expenditures

 
(11,247
)
 
(33,090
)
 
(1,324
)
 

 
(45,661
)
Distributions received
51,497

 

 

 
51,497

 
(102,994
)
 

Purchase of intangible assets

 
(185
)
 

 

 

 
(185
)
Net cash provided by (used in) investing activities
51,497

 
(11,432
)
 
(33,090
)
 
50,173

 
(102,994
)
 
(45,846
)
Financing Activities
 
 
 
 
 
 
 
 
 
 
 
Payments on capital lease obligation

 
(27
)
 

 

 

 
(27
)
Excess tax benefit from share-based compensation

 
277

 

 

 

 
277

Proceeds from share-based compensation
623

 

 

 

 

 
623

Repurchase of common stock
(51,497
)
 

 

 

 

 
(51,497
)
Repayment of intercompany loan

 
(1,561
)
 

 
1,561

 

 

Distributions paid

 
(51,497
)
 

 
(51,497
)
 
102,994

 

Net cash (used in) provided by financing activities
(50,874
)
 
(52,808
)
 

 
(49,936
)
 
102,994

 
(50,624
)
 
 
 
 
 
 
 
 
 
 
 
 
Effect of exchange rate on cash

 

 

 

 

 

 
 
 
 
 
 
 
 
 
 
 
 
Net (decrease) increase in cash and cash equivalents
(637
)
 
(13,619
)
 
(8,704
)
 
772

 

 
(22,188
)
Cash and cash equivalents, beginning of period
1,575

 
121,273

 
27,964

 
1,550

 

 
152,362

Cash and cash equivalents, end of period
$
938

 
$
107,654

 
$
19,260

 
$
2,322

 
$

 
$
130,174










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Table of Contents

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion summarizes the significant factors affecting the consolidated operating results, financial condition, liquidity, and cash flows of the Company as of the dates and for the periods presented below. The following discussion and analysis should be read in conjunction with our Annual Report on Form 10-K for the year ended February 2, 2013 and our unaudited consolidated financial statements and the related notes included in Item 1 of this Quarterly Report. This discussion contains forward-looking statements that are based on the beliefs of our management, as well as assumptions made by, and information currently available to, our management. Actual results could differ materially from those discussed in or implied by forward-looking statements as a result of various factors. See “Forward-Looking Statements.”

Overview
Express is a specialty apparel and accessories retailer offering both women's and men's merchandise. We have over 30 years of experience offering a distinct combination of style and quality at an attractive value, targeting women and men between 20 and 30 years old. We offer our customers an assortment of fashionable apparel and accessories to address fashion needs across multiple wearing occasions, including work, casual, jeanswear, and going-out occasions.

Performance during the second quarter fluctuated. Business was initially very strong, but as traffic to our stores declined through the quarter, our business experienced a corresponding softening. As a result we increased our promotional activity, which led to slightly decreased merchandise margins in the second quarter of 2013. We did, however, see strong responses to certain of our promotional activities in terms of volume, and our customers continued to respond positively to our Spring product line as well as early Fall merchandise. These factors, in addition to our continued growth in e-commerce, allowed us to increase revenues by 7% over the second quarter of 2012. As we look ahead to the remainder of 2013, we are confident in our product line and look forward to making additional progress against our four pillars of growth. Our results with respect to these pillars in the second quarter of 2013 and plans for the near future are as follows.

Improve Productivity of Our Retail Stores
Some progress was made in this area with comparable sales (excluding e-commerce) up 3% over the second quarter of 2012. That being said however, net sales per average gross square foot decreased from $355 for the twelve months ended July 28, 2012 to $345 for the twelve months ended August 3, 2013, primarily driven by decreased traffic and slightly higher promotional activity. Net sales per average gross square foot is determined by dividing net sales (excluding e-commerce sales, shipping and handling revenue related to e-commerce, gift card breakage, and franchise revenue) for the period by average gross square feet during the period.

Expand Our Store Base
In the second quarter of 2013, we opened two new Company-operated stores and closed one store in the United States. As of August 3, 2013, we operated 621 locations. For the remainder of 2013, we expect to open approximately 11 additional stores, including three in Canada. The planned store openings include one Company-owned flagship store in San Francisco. Another flagship location is planned to open in New York City during Spring 2014. These flagships will result in approximately $9.0 million in incremental pre-opening rent expense in 2013, of which $7.9 million was recognized in the first half of 2013 and approximately $1.1 million is expected to be recognized in the second half of 2013.

Expand Our e-Commerce Platform
In the second quarter of 2013, our e-commerce sales increased 27% over the second quarter of 2012. The growth in e-commerce sales in the second quarter of 2013 occurred in both men's and women's merchandise. We believe the significant drivers of our continued e-commerce growth were as follows: improving the look and feel and overall functionality of our website; offering a larger product assortment, with certain sizes, colors, and styles available exclusively online; and implementing free shipping everyday with a minimum purchase of $125. We will continue to look for ways to improve the e-commerce experience and generate additional e-commerce sales. Those sales represented 12% of our total net sales in the second quarter of 2013. We continue to expect this channel to grow to at least 15% of net sales.


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Table of Contents

Expand Internationally
In the second quarter of 2013, we continued our international expansion. Three additional franchise stores opened in Latin America and one store was closed in the Middle East. At quarter end, we were earning revenue from 20 franchise locations, a net increase of 13 stores from the second quarter of 2012. During the balance of 2013, we plan to enter into agreements with two additional franchise partners and expect six or seven franchise store locations to open.
How We Assess the Performance of Our Business
In assessing the performance of our business, we consider a variety of performance and financial measures. These key measures include net sales, comparable sales and other individual store performance factors, gross profit, and selling, general, and administrative expenses. We also review other metrics, such as EBITDA and Adjusted EBITDA.
Net Sales. Net sales reflects revenues from the sale of our merchandise, less returns and discounts, as well as shipping and handling revenue related to e-commerce, gift card breakage, and revenue earned from our franchise agreements.
Comparable Sales and Other Individual Store Performance Factors. Comparable sales are calculated based upon stores that were open at least thirteen full months as of the end of the reporting period. In the fourth quarter of 2010, we began including e-commerce sales in our comparable sales results and adjusted comparable sales figures retroactively back to the second quarter of 2009. A store is not considered a part of the comparable sales base if the square footage of the store changed by more than 20% due to remodel or relocation activities, or if we execute a phased remodel whereby a portion of the store is under construction and, therefore, that portion of the store is not productive selling space. Under the latter scenario, the store is excluded from comparable sales during the construction period only, and is then considered a comparable store when construction is complete. As we continue to increase our store count, we expect that non-comparable sales will begin to contribute more to our total net sales than they currently contribute. We also review sales per gross square foot, average unit retail price, units per transaction, average dollar sales per transaction, traffic, and conversion, among other things, to evaluate the performance of individual stores and on a company-wide basis.
Gross Profit. Gross profit is equal to net sales minus cost of goods sold, buying and occupancy costs. Gross margin measures gross profit as a percentage of net sales. Cost of goods sold, buying and occupancy costs includes the direct cost of purchased merchandise, inventory shrinkage, inventory adjustments, inbound freight to our distribution center and outbound freight to our stores, merchandising, design, planning and allocation, and manufacturing/production costs, occupancy costs related to store operations (such as rent, real estate taxes, landlord charges, common area maintenance, utilities, and depreciation on assets), and all logistics costs associated with our e-commerce business.
 Our cost of goods sold, buying and occupancy costs increase in higher volume quarters because the direct cost of purchased merchandise is tied to sales. Buying and occupancy costs are largely fixed and do not necessarily increase as volume increases. Changes in the mix of our products, such as changes in the proportion of accessories, which are higher margin, may impact our overall cost of goods sold, buying and occupancy costs. We review our inventory levels on an on-going basis in order to identify slow-moving merchandise and generally use markdowns to clear such merchandise. The timing and level of markdowns are driven primarily by seasonality and customer acceptance of our merchandise. We use third-party vendors and company-owned outlet stores to dispose of mark-out-of-stock merchandise. The primary drivers of the costs of the merchandise costs are raw materials, labor in the countries where our merchandise is sourced, and logistics costs associated with transporting our merchandise.
Selling, General, and Administrative Expenses. Selling, general, and administrative expenses include all operating costs not included in cost of goods sold, buying and occupancy costs, with the exception of costs such as proceeds received from insurance claims and gain/loss on disposal of assets, which are included in other operating (income) expense, net. These costs include payroll and other expenses related to operations at our corporate home office, store expenses other than occupancy, and marketing expenses, which primarily include production, mailing, and print advertising costs. With the exception of store payroll and marketing and incentive compensation, these expenses generally are fixed and do not vary proportionally with net sales. As a result, selling, general, and administrative expenses as a percentage of net sales is typically higher in lower volume quarters and lower in higher volume quarters.



23

Table of Contents

Results of Operations
The Second Quarter of 2013 Compared to the Second Quarter of 2012
The table below sets forth the various line items in the unaudited Consolidated Statements of Income and Comprehensive Income as a percentage of net sales for the second quarter of 2013 and the second quarter of 2012.
 
Thirteen Weeks Ended
 
August 3, 2013
 
July 28, 2012
Net sales
100
 %
 
100
%
Cost of goods sold, buying and occupancy costs
69
 %
 
68
%
Gross profit
31
 %
 
32
%
Selling, general, and administrative expenses
25
 %
 
25
%
Other operating (income) expense, net
 %
 
%
Operating income
7
 %
 
7
%
Interest expense
1
 %
 
1
%
Other expense, net
 %
 
%
Income before income taxes
6
 %
 
6
%
Income tax expense
2
 %
 
2
%
Net income
3
 %
 
3
%
Net Sales
 
Thirteen Weeks Ended
 
August 3, 2013
 
July 28, 2012
Net sales (in thousands)
$
486,158

 
$
454,879

Comparable sales percentage change
6
%
 
1
 %
Comparable sales percentage change (excluding e-commerce sales)
3
%
 
(1
)%
Gross square footage at end of period (in thousands)
5,425

 
5,283

Number of:
 
 
 
Stores open at beginning of period
620

 
606

New stores
2

 
8

Closed stores
(1
)
 
(3
)
Stores open at end of period
621

 
611


Net sales increased approximately $31.3 million, or 7%. Comparable sales increased 6% in the second quarter of 2013 compared to the second quarter of 2012. The increased comparable sales resulted from continued growth in e-commerce and an increase in store transactions partially offset by a decrease in store average dollar sales. We attribute the improved store performance to improved conversion rates. Towards the end of the quarter, however, we saw a decrease in traffic which led to additional promotional activity that negatively impacted average dollar sales. Non-comparable sales increased $4.0 million, driven by new store openings and remodels.

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Table of Contents

Gross Profit
The following table shows cost of sales and gross profit in dollars for the stated periods:
 
Thirteen Weeks Ended
 
August 3, 2013
 
July 28, 2012
 
(in thousands)
Cost of goods sold, buying and occupancy costs
$
333,611

 
$
308,358

Gross profit
$
152,547

 
$
146,521

The 80 basis point decrease in gross margin, or gross profit as a percentage of net sales, in the second quarter of 2013 compared to the second quarter of 2012 was comprised of a 40 basis point deterioration in merchandise margin and a 40 basis point increase in buying and occupancy costs. The decrease in merchandise margin was primarily driven by increased promotional activity, as noted previously. The increase in buying and occupancy costs was primarily driven by increased rent, including the impact of approximately $3.9 million of pre-opening rent expense associated with the two flagship stores under construction, as well as increased e-commerce fulfillment costs resulting from additional e-commerce sales.
Selling, General, and Administrative Expenses
The following table shows selling, general, and administrative expenses in dollars for the stated periods:
 
Thirteen Weeks Ended
 
August 3, 2013

July 28, 2012
 
(in thousands)
Selling, general, and administrative expenses
$
119,176

 
$
115,307


The $3.9 million increase in selling, general, and administrative expenses in the second quarter of 2013 compared to the second quarter of 2012 was driven by a $3.9 million increase in payroll, which was primarily related to additional headcount at our home office to support our growth pillars, stock compensation expense, and merit increases.
Income Tax Expense

The following table shows income tax expense in dollars for the stated periods:
 
Thirteen Weeks Ended
 
August 3, 2013
 
July 28, 2012
 
(in thousands)
Income tax expense
$
11,154

 
$
10,374


The effective tax rate was 39.7% for the second quarter of 2013 compared to 39.6% for second quarter of 2012. We anticipate our effective tax rate will be between 39.3% and 39.8% in 2013.
Results of Operations
The Twenty-Six Weeks Ended August 3, 2013 Compared to the Twenty-Six Weeks Ended July 28, 2012
The table below sets forth the various line items in the unaudited Consolidated Statements of Income and Comprehensive Income as a percentage of net sales for the twenty-six weeks ended August 3, 2013 and the twenty-six weeks ended July 28, 2012.

25

Table of Contents

 
Twenty-Six Weeks Ended
 
August 3, 2013
 
July 28, 2012
Net sales
100
 %
 
100
%
Cost of goods sold, buying and occupancy costs
67
 %
 
65
%
Gross profit
33
 %
 
35
%
Selling, general, and administrative expenses
23
 %
 
24
%
Other operating (income) expense, net
 %
 
%
Operating income
9
 %
 
11
%
Interest expense
1
 %
 
1
%
Other expense, net
 %
 
%
Income before income taxes
8
 %
 
10
%
Income tax expense
3
 %
 
4
%
Net income
5
 %
 
6
%
Net Sales
 
Twenty-Six Weeks Ended
 
August 3, 2013
 
July 28, 2012
Net sales (in thousands)
$
994,682

 
$
950,831

Comparable sales percentage change
3
 %
 
2
%
Comparable sales percentage change (excluding e-commerce sales)
(1
)%
 
%
Gross square footage at end of period (in thousands)
5,425

 
5,283

Number of:
 
 
 
Stores open at beginning of period
625

 
609

New stores
5

 
12

Closed stores
(9
)
 
(10
)
Stores open at end of period
621

 
611


Net sales increased approximately $43.9 million, or 5%. Comparable sales increased 3% for the twenty-six weeks ended August 3, 2013 compared to the twenty-six weeks ended July 28, 2012. The increased comparable sales resulted from continued growth in e-commerce and an increase in store transactions partially offset by a decrease in store average dollar sales. We attribute the improved store performance to improved conversion rates. The decrease in average dollar sales was driven by additional promotional activity throughout the first quarter and in the latter part of the second quarter. Non-comparable sales increased $15.8 million, driven by new store openings and remodels.
Gross Profit
The following table shows cost of sales and gross profit in dollars for the stated periods:
 
Twenty-Six Weeks Ended
 
August 3, 2013
 
July 28, 2012
 
(in thousands)
Cost of goods sold, buying and occupancy costs
$
671,358

 
$
615,543

Gross profit
$
323,324

 
$
335,288

The 280 basis point decrease in gross margin, or gross profit as a percentage of net sales, in the twenty-six weeks ended August 3, 2013 compared to the twenty-six weeks ended July 28, 2012 was comprised of a 150 basis point deterioration in merchandise margin and a 130 basis point increase in buying and occupancy costs. The decrease in merchandise margin was primarily driven by increased promotional activity in the first and second quarters of 2013, as noted previously. The increase in buying and occupancy costs was primarily driven by rent, including the impact of approximately $7.9 million of pre-opening

26

Table of Contents

rent expense associated with the two flagship stores under construction, as well as increased e-commerce fulfillment costs resulting from additional e-commerce sales.
Selling, General, and Administrative Expenses
The following table shows selling, general, and administrative expenses in dollars for the stated periods:
 
Twenty-Six Weeks Ended
 
August 3, 2013
 
July 28, 2012
 
(in thousands)
Selling, general, and administrative expenses
$
231,799

 
$
229,502


The $2.3 million increase in selling, general, and administrative expenses in the twenty-six weeks ended August 3, 2013 compared to the twenty-six weeks ended July 28, 2012 was driven by a $6.2 million increase in payroll, which was primarily related to stock compensation expense, additional headcount at our home office to support our growth pillars, and merit-based pay increases, and a $1.3 million increase in information technology expenses to support our growth pillars. These increases were partially offset by a $3.4 million decrease in marketing expense, including direct mail and point-of-sale visual marketing, and a $2.1 million decrease in incentive compensation.
Income Tax Expense

The following table shows income tax expense in dollars for the stated periods:
 
Twenty-Six Weeks Ended
 
August 3, 2013
 
July 28, 2012
 
(in thousands)
Income tax expense
$
32,377

 
$
38,284


The effective tax rate was 39.6% for the twenty-six weeks ended August 3, 2013 compared to 39.8% for the twenty-six weeks ended July 28, 2012. We anticipate our effective tax rate will be between 39.3% and 39.8% in 2013.

Liquidity and Capital Resources
General

Our business relies on cash flows from operations as our primary source of liquidity. We do, however, have access to additional liquidity, if needed, through borrowings under our Revolving Credit Facility. Our primary cash needs are for merchandise inventories, payroll, store rent, capital expenditures, primarily associated with opening new stores, remodeling existing stores, and information technology projects, and marketing. The most significant components of our working capital are merchandise inventories, accounts payable, and other accrued expenses. Our liquidity position benefits from the fact that we generally collect cash from sales to customers the same day or, in the case of credit or debit card transactions, within 3 to 5 days of the related sale, and have up to 75 days to pay certain merchandise vendors and 45 days to pay the majority of our non-merchandise vendors.

We believe that cash generated from operations and the availability of borrowings under our Revolving Credit Facility will be sufficient to meet working capital requirements, anticipated capital expenditures, and scheduled interest payments for at least the next 12 months.
Cash Flow Analysis
A summary of cash provided by or used in operating, investing and financing activities are shown in the following table:
 

27

Table of Contents

 
Twenty-Six Weeks Ended
August 3, 2013
 
July 28, 2012
 
(in thousands)
Provided by operating activities
$
36,533

 
$
74,282

Used in investing activities
(45,607
)
 
(45,846
)
Used in financing activities
(12,893
)
 
(50,624
)
Increase (decrease) in cash and cash equivalents
(22,047
)
 
(22,188
)
Cash and cash equivalents at end of period
$
234,250

 
$
130,174


Net Cash Provided by Operating Activities
The majority of our operating cash inflows are derived from sales. Our operating cash outflows generally consist of payments to vendors for merchandise, employees for wages, salaries, and other employee benefits, and landlords for rent. Operating cash outflows also include payments for income taxes and interest on long-term debt.

Net cash provided by operating activities was $36.5 million for the twenty-six weeks ended August 3, 2013 compared to $74.3 million for the twenty-six weeks ended July 28, 2012, a decrease of $37.7 million. The decrease in cash provided by operations primarily related to the following:

Items included in net income provided $95.2 million of cash for the twenty-six weeks ended August 3, 2013 compared to $100.3 million for the twenty-six weeks ended July 28, 2012. The decrease in the current year was primarily driven by the decreased performance of the business primarily during the first quarter.

In addition to the decrease in cash provided by items included in net income discussed above, there was $58.6 million of cash used due to working capital changes during the twenty-six weeks ended August 3, 2013 compared to $26.0 million of cash used in the twenty-six weeks ended July 28, 2012. Working capital is subject to cyclical operating needs, the timing of receivable collections and payable and expense payments, and seasonal fluctuations in our operations. The $32.6 million change primarily relates to the timing of merchandise and real estate payments in the first and second quarters of 2013 versus the first and second quarters of 2012 and increased cash outflows for purchases of inventory. The primary reasons for the increase in inventory are to support our sales plan for the remainder of the year and to invest in certain key categories that are expected to generate significant volume, including denim and woven tops.
 Net Cash Used in Investing Activities
Investing activities consist primarily of capital expenditures for new and remodeled store construction and fixtures, information technology, and home office and design studio renovations.

Net cash used in investing activities totaled $45.6 million for the twenty-six weeks ended August 3, 2013 compared to $45.8 million for the twenty-six weeks ended July 28, 2012, a $0.2 million change.

We expect capital expenditures for the remainder of 2013 to be approximately $65.0 million to $70.0 million, primarily driven by new store construction, including two flagship locations which require additional expenditures over that of a typical new store opening. These capital expenditures do not include the impact of landlord allowances, which are expected to be approximately $6.0 to $11.0 million for the remainder of 2013.
Net Cash Used in Financing Activities
Net cash used in financing activities totaled $12.9 million for the twenty-six weeks ended August 3, 2013 as compared to $50.6 million for the twenty-six weeks ended July 28, 2012, a decrease of approximately $37.7 million. The decrease relates to lower share buyback activity during the twenty-six weeks ended August 3, 2013 compared to the twenty-six weeks ended July 28, 2012.
Credit Facilities

The following provides an overview of the current status of our long term debt arrangements. Refer to Note 10 of our unaudited Consolidated Financial Statements for additional information related to our long-term debt arrangements.


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Revolving Credit Facility
On July 29, 2011, Express Holding and its domestic subsidiaries entered into an amended and restated $200.0 million secured asset-based loan credit agreement. The amended Revolving Credit Facility is scheduled to expire on July 29, 2016 and allows for up to $30.0 million of swing line advances and up to $45.0 million to be available in the form of letters of credit.
As of August 3, 2013, there were no borrowings outstanding under the Revolving Credit Facility, and we had $197.4 million of availability. We were not subject to the fixed charge coverage ratio covenant in the Revolving Credit Facility at August 3, 2013 because excess availability plus eligible cash collateral exceeded 10% of the borrowing base.
Senior Notes
On March 5, 2010, Express, LLC and Express Finance, as co-issuers, issued $250.0 million of 8 3/4% Senior Notes due 2018 at an offering price of 98.6% of the face value. Interest on the Senior Notes is payable on March 1 and September 1 of each year. Unamortized debt issuance costs outstanding related to the Senior Notes as of August 3, 2013 were $5.6 million.
 
Contractual Obligations

Our Company's contractual obligations and other commercial commitments did not change materially between February 2, 2013 and August 3, 2013. For additional information regarding our contractual obligations as of February 2, 2013, see "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the fiscal year ended February 2, 2013.
Seasonality
Our business is seasonal and, historically, we have realized a higher portion of our net sales and net income in the third and fourth quarters due primarily to early Fall selling patterns as well as the impact of the holiday season. Generally, the annual sales split is approximately 45% for the Spring season (first and second quarters) and 55% for the Fall season (third and fourth quarters). Normal cash requirements are typically higher in the first and third quarters due to inventory-related working capital requirements for early Fall and holiday selling periods. Our business is also subject, at certain times, to calendar shifts, which may occur during key selling periods close to holidays such as Easter, Thanksgiving, and Christmas, and regional fluctuations for events such as sales tax holidays.
Critical Accounting Policies
Management has determined that our most critical accounting policies are those related to revenue recognition, merchandise inventory valuation, long-lived assets valuation, claims and contingencies, income taxes, and share-based payments. We continue to monitor our accounting policies to ensure proper application of current rules and regulations. There have been no significant changes to the policies discussed in our Annual Report on Form 10-K for the year ended February 2, 2013.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

Our Revolving Credit Facility bears interest at variable rates; however, we did not borrow any amounts under the Revolving Credit Facility during the twenty-six weeks ended August 3, 2013. Borrowings under our Senior Notes bear interest at a fixed rate. For fixed rate debt, interest rate changes affect the fair value of such debt, but do not impact earnings or cash flow. Changes in interest rates are not expected to have a material impact on our future earnings or cash flows given our limited exposure to such changes.

Foreign Currency Exchange Risk

All of our purchases are denominated in United States dollars and, therefore we are not exposed to foreign currency exchange risk on these purchases. However, we currently operate 12 stores in Canada, with the functional currency of our Canadian operations being the Canadian dollar. Our Canadian subsidiaries have intercompany accounts with our United States subsidiaries that eliminate upon consolidation, but the transactions involving such accounts do expose us to foreign currency exchange risk. We do not utilize hedging instruments to mitigate foreign currency exchange risks. As of August 3, 2013, a hypothetical 10% change in the Canadian foreign exchange rate would have impacted our results of operations by approximately $2.0 million.

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ITEM 4. CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e) promulgated under the Securities Exchange Act of 1934) that are designed to provide reasonable assurance that information required to be disclosed in our Securities Exchange Act of 1934 reports is recorded, processed, summarized, and reported within the time periods specified in the SEC's rules and forms and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable, and not absolute, assurance of achieving the desired control objectives. In reaching a reasonable level of assurance, management necessarily was required to apply its judgment in evaluating the cost benefit relationship of possible controls and procedures.

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation prior to filing this report of our disclosure controls and procedures. Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of August 3, 2013.

Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) that occurred during the second quarter of 2013 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION


ITEM 1. LEGAL PROCEEDINGS.
Information relating to legal proceedings is set forth in Note 12 to our unaudited Consolidated Financial Statements included in Part I of this Quarterly Report and is incorporated herein by reference.

ITEM 1A.
RISK FACTORS.
Our risk factors as of August 3, 2013 have not changed materially from those disclosed in our Annual Report on Form 10-K filed with the SEC on April 2, 2013. The risk factors disclosed in our Annual Report on Form 10-K, in addition to the other information set forth in this Quarterly Report, could materially affect our business, financial condition or results.

ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
The following table provides information regarding the purchase of shares of our common stock made by or on behalf of the Company or any "affiliated purchaser" as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934, during each month of the quarterly period ended August 3, 2013:
Month
 
Total Number of Shares Purchased (1)
 
Average Price Paid per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2)
 
Approximate Dollar Value of Shares that May Yet be Purchased under the Plans or Programs (2)
 
 
(in thousands, except per share amounts)
May 5, 2013 - June 1, 2013
 
3

 
$
19.02

 

 
$
35,038

June 2, 2013 - July 6, 2013
 
384

 
$
21.50

 
383

 
$
26,813

July 7, 2013 - August 3, 2013
 
252

 
$
22.42

 
252

 
$
21,149

Total
 
639

 
 
 
635

 
 
(1) Includes shares of restricted stock purchased in connection with employee tax withholding obligations under the 2010 Plan, which are not purchases made under the Company's publicly announced program.

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(2) On May 24, 2012, the Board authorized the repurchase of up to $100.0 million of the Company's common stock, which may be made from time to time in open market or privately negotiated transactions. The Repurchase Program may be suspended, modified, or discontinued at any time, and the Company has no obligation to repurchase any amount of its common stock under the program.


ITEM 3.
DEFAULTS UPON SENIOR SECURITIES.
Not applicable.


ITEM 4. MINE SAFETY DISCLOSURE

Not applicable.

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ITEM 5. OTHER INFORMATION.

None.

ITEM 6. EXHIBITS.

Exhibits. The following exhibits are filed or furnished with this Quarterly Report:
Exhibit
Number
Exhibit Description
3.1
Certificate of Amendment of Certificate of Incorporation of Express, Inc. (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed by Express, Inc. on June 11, 2013)
3.2
Amended and Restated Bylaws of Express, Inc. (incorporated by reference to Exhibit 3.2 to the Current Report on Form 8-K filed by Express, Inc. on June 11, 2013)
31.1
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
Certification of Principal Financial Officer and Principal Executive Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS
XBRL Instance Document. *
101.SCH
XBRL Taxonomy Extension Schema Document.*
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document.*
101.LAB
XBRL Taxonomy Extension Label Linkbase Document. *
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document. *
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document. *
+ Indicates a management contract or compensatory plan or arrangement.
* Pursuant to Regulation S-T, this interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections.


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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
Date:
September 4, 2013
EXPRESS, INC.
 
 
 
 
 
 
By:
/s/ D. Paul Dascoli
 
 
 
D. Paul Dascoli

 
 
 
Senior Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer)



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