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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended November 2, 2019

OR

☐			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)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class			Trading Symbol(s)			Name of each exchange on which registered
Common Stock, $.01 par value			EXPR			The New York Stock Exchange

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  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes  ☒   No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer			☐			Accelerated filer			☒
Non-accelerated filer			☐			Smaller reporting company			☐
						Emerging growth company			☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ☐    No  ☒

The number of outstanding shares of the registrant’s common stock was 63,907,212 as of November 30, 2019.

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FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (“Quarterly Report”) contains forward-looking statements within the “safe harbor” provisions of the Private Securities Reform Act of 1995 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,” “potential,” “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, initiatives, or strategies, plans to repurchase shares of our common stock, 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:

External Risks such as:

•changes in consumer spending and general economic conditions;

•customer traffic at malls, shopping centers, and at our stores;

•competition from other retailers;

•our dependence upon independent third parties to manufacture all of our merchandise;

•changes in the cost of raw materials, labor, and freight;

•supply chain disruption and increased tariffs;

•difficulties associated with our distribution facilities;

•natural disasters, extreme weather, public health issues, fire, and other events that cause business interruption; and

•our reliance on third parties to provide us with certain key services for our business.

Strategic Risks such as:

•our ability to identify and respond to new and changing fashion trends, customer preferences, and other related factors;

•fluctuations in our sales, results of operations, and cash levels on a seasonal basis and due to a variety of other factors, including our product offerings relative to customer demand, the mix of merchandise we sell, promotions, inventory levels, and sales mix between stores and e-commerce;

•our dependence on a strong brand image;

•our ability to adapt to changes in consumer behavior and develop and maintain a relevant and reliable omni-channel experience for our customers;

•our dependence upon key executive management; and

•our ability to execute our growth strategy, including but not limited to, improving brand articulation and customer retention and identifying cost savings opportunities.

Information Technology Risks such as:

•the failure or breach of information systems upon which we rely; and

•our ability to protect our customer data from fraud and theft.

Financial Risks such as:

•our substantial lease obligations;

•restrictions imposed on us under the terms of our asset-based loan facility, including restrictions on our ability to repurchase shares of our common stock; and

•impairment charges on long-lived assets, inclusive of intangible assets.

Legal, Regulatory, and Compliance Risks such as:

•claims made against us resulting in litigation or changes in laws and regulations applicable to our business;

•our inability to protect our trademarks or other intellectual property rights that may preclude the use of our trademarks or other intellectual property around the world;

•changes in tax requirements, results of tax audits, and other factors that may cause fluctuations in our effective tax rate; and

•our failure to maintain adequate internal controls.

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 a 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, 2019 (“Annual Report”), filed with the Securities and Exchange Commission (“SEC”) on March 19, 2019. 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 required by law.

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INDEX

PART I			FINANCIAL INFORMATION			4
ITEM 1.			FINANCIAL STATEMENTS.			4
ITEM 2.			MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.			21
ITEM 3.			QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.			31
ITEM 4.			CONTROLS AND PROCEDURES.			31
PART II			OTHER INFORMATION			31
ITEM 1.			LEGAL PROCEEDINGS.			31
ITEM 1A.			RISK FACTORS.			32
ITEM 2.			UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.			32
ITEM 3.			DEFAULTS UPON SENIOR SECURITIES.			32
ITEM 4.			MINE SAFETY DISCLOSURES.			32
ITEM 5.			OTHER INFORMATION.			32
ITEM 6.			EXHIBITS.			33
SIGNATURES									34

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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)

			November 2, 2019						February 2, 2019
ASSETS
CURRENT ASSETS:
Cash and cash equivalents			$	167,915					$	171,670
Receivables, net			12,199						17,369
Inventories			345,931						267,766
Prepaid rent			6,905						30,047
Other			33,387						25,176
Total current assets			566,337						512,028
RIGHT OF USE ASSET, NET			1,043,874						—
PROPERTY AND EQUIPMENT			991,550						1,083,347
Less: accumulated depreciation			(734,556)						(719,068)
Property and equipment, net			256,994						364,279
TRADENAME/DOMAIN NAMES/TRADEMARKS			197,618						197,618
DEFERRED TAX ASSETS			6,379						5,442
OTHER ASSETS			6,712						7,260
Total assets			$	2,077,914					$	1,086,627
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Short-term lease liability			$	222,439					$	—
Accounts payable			221,721						155,913
Deferred revenue			32,394						40,466
Accrued expenses			93,504						78,313
Total current liabilities			570,058						274,692
LONG-TERM LEASE LIABILITY			936,547						—
DEFERRED LEASE CREDITS			2,258						129,505
OTHER LONG-TERM LIABILITIES			20,049						97,252
Total liabilities			1,528,912						501,449
COMMITMENTS AND CONTINGENCIES (Note 10)
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; 93,632 shares and 93,632 shares issued at November 2, 2019 and February 2, 2019, respectively, and 64,501 shares and 67,424 shares outstanding at November 2, 2019 and February 2, 2019, respectively			936						936
Additional paid-in capital			214,389						211,981
Retained earnings			675,539						713,864
Treasury stock – at average cost; 29,131 shares and 26,208 shares at November 2, 2019 and February 2, 2019, respectively			(341,862)						(341,603)
Total stockholders’ equity			549,002						585,178
Total liabilities and stockholders’ equity			$	2,077,914					$	1,086,627

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																		Thirty-Nine Weeks Ended
			November 2, 2019						November 3, 2018						November 2, 2019						November 3, 2018
NET SALES			$	488,483					$	514,961					$	1,412,469					$	1,487,918
COST OF GOODS SOLD, BUYING AND OCCUPANCY COSTS			350,810						356,812						1,025,795						1,046,204
Gross profit			137,673						158,149						386,674						441,714
OPERATING EXPENSES:
Selling, general, and administrative expenses			144,301						148,294						415,391						426,583
Restructuring costs			—						166						—						166
Other operating expense/(income), net			47						(513)						(728)						(689)
Total operating expenses			144,348						147,947						414,663						426,060
OPERATING (LOSS)/INCOME			(6,675)						10,202						(27,989)						15,654
INTEREST (INCOME)/EXPENSE, NET			(690)						32						(2,185)						168
OTHER INCOME, NET			—						—						—						(500)
(LOSS)/INCOME BEFORE INCOME TAXES			(5,985)						10,170						(25,804)						15,986
INCOME TAX (BENEFIT)/EXPENSE			(2,880)						2,203						(3,062)						5,268
NET (LOSS)/INCOME			$	(3,105)					$	7,967					$	(22,742)					$	10,718
COMPREHENSIVE (LOSS)/INCOME			$	(3,105)					$	7,967					$	(22,742)					$	10,718
EARNINGS PER SHARE:
Basic			$	(0.05)					$	0.11					$	(0.34)					$	0.14
Diluted			$	(0.05)					$	0.11					$	(0.34)					$	0.14
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic			66,438						72,512						66,845						73,959
Diluted			66,438						73,473						66,845						74,757

See Notes to Unaudited Consolidated Financial Statements.

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EXPRESS, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

(Amounts in Thousands) (Unaudited) 

			Common Stock																		Treasury Stock
			Shares Outstanding			Par Value			Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Loss			Shares			At Average Cost						Total
BALANCE, February 3, 2018			76,724			$	926		$	199,099		$	704,395		$	—		15,923			$	(256,106)					$	648,314
Net income			—			—			—			517			—			—			—						517
Exercise of stock options and restricted stock			854			9			(9)			—			—			—			—						—
Share-based compensation			—			—			3,814			—			—			—			—						3,814
Repurchase of common stock			(2,519)			—			—			—			—			2,519			(18,245)						(18,245)
BALANCE, May 5, 2018			75,059			$	935		$	202,904		$	704,912		$	—		18,442			$	(274,351)					$	634,400
Net income			—			—			—			2,234			—			—			—						2,234
Exercise of stock options and restricted stock			131			1			(1)			—			—			—			—						—
Share-based compensation			—			—			3,452			—			—			—			—						3,452
Repurchase of common stock			(1,809)			—			—			—			—			1,809			(16,396)						(16,396)
BALANCE, August 4, 2018			73,381			$	936		$	206,355		$	707,146		$	—		20,251			$	(290,747)					$	623,690
Net income			—			—			—			7,967			—			—			—						7,967
Exercise of stock options and restricted stock			3			—			(29)			(14)			—			(3)			43						—
Share-based compensation			—			—			3,550			—			—			—			—						3,550
Repurchase of common stock			(2,480)			—			—			—			—			2,480			(24,170)						(24,170)
BALANCE, November 3, 2018			70,904			$	936		$	209,876		$	715,099		$	—		22,728			$	(314,874)					$	611,037

			Common Stock																		Treasury Stock
			Shares Outstanding			Par Value			Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Loss			Shares			At Average Cost						Total
BALANCE, February 2, 2019			67,424			$	936		$	211,981		$	713,864		$	—		26,208			$	(341,603)					$	585,178
Adoption of ASC Topic 842			—			—			—			(5,482)			—			—			—						(5,482)
Net loss			—			—			—			(9,934)			—			—			—						(9,934)
Exercise of stock options and restricted stock			1,024			—			(4,316)			(8,735)			—			(1,024)			13,051						—
Share-based compensation			—			—			2,372			—			—			—			—						2,372
Repurchase of common stock			(1,273)			—			—			—			—			1,273			(6,387)						(6,387)
BALANCE, May 4, 2019			67,175			$	936		$	210,037		$	689,713		$	—		26,457			$	(334,939)					$	565,747
Net loss			—			—			—			(9,703)			—			—			—						(9,703)
Exercise of stock options and restricted stock			93			—			(311)			(867)			—			(93)			1,178						—
Share-based compensation			—			—			2,424			—			—			—			—						2,424
Repurchase of common stock			(1)			—			—			—			—			1			(4)						(4)
BALANCE, August 3, 2019			67,267			$	936		$	212,150		$	679,143		$	—		26,365			$	(333,765)					$	558,464
Net loss			—			—			—			(3,105)			—			—			—						(3,105)
Exercise of stock options and restricted stock			55			—			(169)			(499)			—			(55)			668						—
Share-based compensation			—			—			2,408			—			—			—			—						2,408
Repurchase of common stock			(2,821)			—			—			—			—			2,821			(8,765)						(8,765)
BALANCE, November 2, 2019			64,501			$	936		$	214,389		$	675,539		$	—		29,131			$	(341,862)					$	549,002

See Notes to Unaudited Consolidated Financial Statements.

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EXPRESS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in Thousands) (Unaudited)

			Thirty-Nine Weeks Ended
			November 2, 2019						November 3, 2018
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss)/income			$	(22,742)					$	10,718
Adjustments to reconcile net (loss)/income to net cash provided by operating activities:
Depreciation and amortization			64,121						64,099
Loss on disposal of property and equipment			1,098						303
Impairment charge			2,282						—
Impairment of equity method investment			500						—
Share-based compensation			7,204						10,816
Deferred taxes			212						(42)
Landlord allowance amortization			(1,782)						(8,702)
Other non-cash adjustments			(500)						(500)
Changes in operating assets and liabilities:
Receivables, net			5,169						(3,412)
Inventories			(78,165)						(102,039)
Accounts payable, deferred revenue, and accrued expenses			71,891						52,187
Other assets and liabilities			(16,454)						(5,113)
Net cash provided by operating activities			32,834						18,315
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures			(20,503)						(32,402)
Net cash used in investing activities			(20,503)						(32,402)
CASH FLOWS FROM FINANCING ACTIVITIES:
Costs incurred in connection with debt arrangements			(849)						—
Payments on lease financing obligations			(81)						(1,385)
Repayments of financing arrangements			—						(750)
Repurchase of common stock under share repurchase program			(13,603)						(56,161)
Repurchase of common stock for tax withholding obligations			(1,553)						(2,650)
Net cash used in financing activities			(16,086)						(60,946)
NET DECREASE IN CASH AND CASH EQUIVALENTS			(3,755)						(75,033)
CASH AND CASH EQUIVALENTS, Beginning of period			171,670						236,222
CASH AND CASH EQUIVALENTS, End of period			$	167,915					$	161,189

See Notes to Unaudited Consolidated Financial Statements.

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Notes to Unaudited Consolidated Financial Statements

1. Description of Business and Basis of Presentation

Business Description

Express, Inc., together with its subsidiaries (“Express” or the “Company”), is a leading fashion brand for women and men. Since 1980, Express has provided the latest apparel and accessories to help customers build a wardrobe for every occasion, offering fashion and quality at an attractive value. As of November 2, 2019, Express operated 411 primarily mall-based retail stores in the United States and Puerto Rico as well as 215 factory outlet stores. Additionally, as of November 2, 2019, the Company earned revenue from 13 franchise stores in Latin America. These franchise stores are operated by franchisees pursuant to franchise agreements. Under the franchise agreements, the franchisees operate stand-alone Express 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 “2019” and “2018” represent the 52-week period ended February 1, 2020 and the 52-week period ended February 2, 2019, respectively. All references herein to “the third quarter of 2019” and “the third quarter of 2018” represent the thirteen weeks ended November 2, 2019 and November 3, 2018, 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 and therefore do not include all of the information or 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 2019. Therefore, these statements should be read in conjunction with the Consolidated Financial Statements and Notes thereto for the year ended February 2, 2019, included in the Company’s Annual Report on Form 10-K, filed with the SEC on March 19, 2019.

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.

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 President and 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 and outlet stores, e-commerce operations, and franchise operations.

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 unaudited Consolidated Financial Statements and the reported amounts of revenue and expense during the reporting period, as well as the related disclosure of contingent assets and liabilities as of the date of the unaudited Consolidated Financial Statements. Actual results may differ from those estimates. The Company revises its estimates and assumptions as new information becomes available.

Recently Issued Accounting Pronouncements - Adopted

Leases

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, “Leases (Topic 842)” (“ASC 842”). This ASU is a comprehensive new standard that amends various aspects of existing guidance for leases and requires additional disclosures about leasing arrangements. It requires lessees to recognize lease assets and lease liabilities for most leases, including those leases previously classified as operating leases. ASC 842 requires a modified retrospective transition for leases existing at or entered into after the beginning of the earliest comparative

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period presented in the financial statements. In July 2018, the FASB issued ASU 2018-11, “Leases (Topic 842): Targeted Improvements,” that allows entities to recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption without adjustment to the financial statements for periods prior to adoption.

The Company adopted ASC 842 on February 3, 2019 on a modified retrospective basis and applied the new standard to all leases through a cumulative-effect adjustment to beginning retained earnings. As a result, comparative financial information has not been restated and continues to be reported under the accounting standards in effect for the respective periods. The Company elected the package of practical expedients permitted under the transition guidance within the new standard, which permitted companies not to reassess prior conclusions on lease identification, lease classification and initial direct costs. The Company did not elect the hindsight practical expedient.

On February 3, 2019, the Company recognized leases, primarily related to its stores and corporate headquarters, on its unaudited Consolidated Balance Sheet, as right-of-use assets of $1.2 billion with corresponding lease liabilities of $1.3 billion and eliminated certain existing lease-related assets and liabilities as a net adjustment to the right-of-use assets. The Company’s right-of-use assets represent a right to use underlying assets for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Lease assets and liabilities are recognized at the lease commencement date (date on which the Company gains access to the property) based on the estimated present value of lease payments over the lease term, net of landlord allowances to be received. The Company accounts for the lease and non-lease components as a single lease component for all current classes of leases. In connection with this adoption, the Company recorded a transition adjustment, which was a net reduction of retained earnings of $5.5 million. This adjustment primarily reflects the difference between the right-of-use assets and lease liabilities recorded upon adoption, the elimination of the lease financing obligations and related assets described in Note 7, including the related put option, and the recognition of the impairment, upon adoption, of certain right-of-use assets totaling $1.2 million. The adoption of the new standard had no material impact on the unaudited Consolidated Statements of Income and Comprehensive Income, the unaudited Consolidated Statements of Cash Flows, and did not impact the Company's compliance with debt covenants.

2. Revenue Recognition

The following is information regarding the Company’s major product categories and sales channels:

			Thirteen Weeks Ended																		Thirty-Nine Weeks Ended
			November 2, 2019						November 3, 2018						November 2, 2019						November 3, 2018
			(in thousands)
Apparel			$	422,468					$	446,395					$	1,219,628					$	1,292,029
Accessories and other			48,355						50,860						144,846						151,007
Other revenue			17,660						17,706						47,995						44,882
Total net sales			$	488,483					$	514,961					$	1,412,469					$	1,487,918

			Thirteen Weeks Ended																		Thirty-Nine Weeks Ended
			November 2, 2019						November 3, 2018						November 2, 2019						November 3, 2018
			(in thousands)
Retail			$	356,758					$	388,830					$	1,022,703					$	1,137,092
Outlet			114,065						108,425						341,771						305,944
Other revenue			17,660						17,706						47,995						44,882
Total net sales			$	488,483					$	514,961					$	1,412,469					$	1,487,918

In light of the progress made in transforming into an omni-channel business model and the growth of the outlet channel, during the first quarter of 2019, the Company began providing sales channel information for retail, which includes retail store and e-commerce sales, outlets, and other revenue. Historically, the Company provided sales data for stores, which included both retail and outlet stores, and e-commerce. Other revenue is unchanged from the Company’s prior classification.

Other revenue consists primarily of sell-off revenue related to mark-out-of-stock inventory sales to third parties, shipping and handling revenue related to e-commerce activity, revenue earned from our private label credit card agreement, revenue from gift card breakage, and revenue from franchise agreements.

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Revenue related to the Company’s international franchise operations were not material for any period presented and, therefore, are not reported separately from domestic revenue.

Revenue Recognition Policies

Merchandise Sales

The Company recognizes sales for in-store purchases at the point-of-sale. Revenue related to e-commerce transactions is recognized upon shipment based on the fact that control transfers to the customer at that time. The Company has made a policy election to treat shipping and handling as costs to fulfill the contract and as a result any amounts received from customers are included in the transaction price allocated to the performance obligation of providing goods with a corresponding amount accrued within cost of goods sold, buying and occupancy costs in the unaudited Consolidated Statements of Income and Comprehensive Income for amounts paid to applicable carriers. Associate discounts on merchandise purchases are classified as a reduction of net sales. Net sales excludes sales tax collected from customers and remitted to governmental authorities.

Loyalty Program

The Company maintains a customer loyalty program in which customers earn points toward rewards for qualifying purchases and other marketing activities. Upon reaching specified point values, customers are issued a reward, which they may redeem on merchandise purchases at the Company’s stores or on its website. Generally, rewards earned must be redeemed within 60 days from the date of issuance. The Company defers a portion of merchandise sales based on the estimated standalone selling price of the points earned. This deferred revenue is recognized as certificates are redeemed or expire. To calculate this deferral, the Company makes assumptions related to card holder redemption rates based on historical experience. The loyalty liability is included in deferred revenue on the unaudited Consolidated Balance Sheets.

			Thirteen Weeks Ended																		Thirty-Nine Weeks Ended
			November 2, 2019						November 3, 2018						November 2, 2019						November 3, 2018
			(in thousands)
Beginning balance loyalty deferred revenue			$	14,766					$	18,313					$	15,319					$	14,186
Reduction in revenue/(revenue recognized)			(1,313)						(2,843)						(1,866)						1,284
Ending balance loyalty deferred revenue			$	13,453					$	15,470					$	13,453					$	15,470

Sales Returns Reserve

The Company reduces net sales and provides a reserve for projected merchandise returns based on prior experience. Merchandise returns are often resalable merchandise and are refunded by issuing the same payment tender as the original purchase. The sales returns reserve was $11.8 million and $9.9 million as of November 2, 2019 and February 2, 2019, respectively, and is included in accrued expenses on the unaudited Consolidated Balance Sheets. The asset related to projected returned merchandise is included in other assets on the unaudited Consolidated Balance Sheets.

Gift Cards

The Company sells gift cards in its stores, on its e-commerce website, and through third parties. These gift cards do not expire or lose value over periods of inactivity. The Company accounts for gift cards by recognizing a liability at the time a gift card is sold. The gift card liability balance was $18.8 million and $25.1 million, as of November 2, 2019 and February 2, 2019, respectively, and is included in deferred revenue on the Consolidated Balance Sheets. The Company recognizes revenue from gift cards when they are redeemed by the customer. The Company also recognizes income on unredeemed gift cards, referred to as “gift card breakage.” Gift card breakage is recognized proportionately using a time-based attribution method from issuance of the gift card to the time when it can be determined that the likelihood of the gift card being redeemed is remote and that there is no legal obligation to remit unredeemed gift cards to relevant jurisdictions. The gift card breakage rate is based on historical redemption patterns. Gift card breakage is included in net sales in the unaudited Consolidated Statements of Income and Comprehensive Income.

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			Thirteen Weeks Ended																		Thirty-Nine Weeks Ended
			November 2, 2019						November 3, 2018						November 2, 2019						November 3, 2018
			(in thousands)
Beginning gift card liability			$	19,966					$	20,335					$	25,133					$	26,737
Issuances			7,157						7,393						22,826						24,376
Redemptions			(7,699)						(8,241)						(26,617)						(29,681)
Gift card breakage			(623)						(616)						(2,541)						(2,561)
Ending gift card liability			$	18,801					$	18,871					$	18,801					$	18,871

Private Label Credit Card

The Company has an agreement with Comenity Bank (the “Bank”) to provide customers with private label credit cards (the “Card Agreement”) which was amended on August 28, 2017 to extend the term of the arrangement through December 31, 2024. Each private label credit card bears the logo of the Express brand and can only be used at the Company’s store locations and e-commerce channel. The Bank is the sole owner of the accounts issued under the private label credit card program and absorbs the losses associated with non-payment by the private label card holders and a portion of any fraudulent usage of the accounts.

Pursuant to the Card Agreement, the Company receives amounts from the Bank during the term based on a percentage of private label credit card sales and is also eligible to receive incentive payments for the achievement of certain performance targets. These funds are recorded as net sales in the unaudited Consolidated Statements of Income and Comprehensive Income. The Company also receives reimbursement funds from the Bank for expenses the Company incurs. These reimbursement funds are used by the Company to fund marketing and other programs associated with the private label credit card. The reimbursement funds received related to private label credit cards are recorded as net sales in the unaudited Consolidated Statements of Income and Comprehensive Income.

In connection with the Card Agreement, the Bank agreed to pay the Company a $20.0 million refundable payment which the Company recognized upon receipt as deferred revenue within other long-term liabilities in the Consolidated Balance Sheets and began to recognize into income on a straight-line basis commencing January of 2018. As of November 2, 2019, the deferred revenue balance of $14.9 million will be recognized over the remaining term of the amended Card Agreement within the other revenue component of net sales.

			Thirteen Weeks Ended																		Thirty-Nine Weeks Ended
			November 2, 2019						November 3, 2018						November 2, 2019						November 3, 2018
			(in thousands)
Beginning balance refundable payment liability			$	15,589					$	18,467					$	17,028					$	19,906
Recognized in revenue			(719)						(719)						(2,158)						(2,158)
Ending balance refundable payment liability			$	14,870					$	17,748					$	14,870					$	17,748

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																		Thirty-Nine Weeks Ended
			November 2, 2019						November 3, 2018						November 2, 2019						November 3, 2018
			(in thousands)
Weighted-average shares - basic			66,438						72,512						66,845						73,959
Dilutive effect of stock options and restricted stock units			—						961						—						798
Weighted-average shares - diluted			66,438						73,473						66,845						74,757

Equity awards representing 8.9 million and 7.2 million shares of common stock were excluded from the computation of diluted earnings per share for the thirteen and thirty-nine weeks ended November 2, 2019, as the inclusion of these awards would have been anti-dilutive. Equity awards representing 2.5 million and 3.4 million shares of common stock were excluded from the

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computation of diluted earnings per share for the thirteen and thirty-nine weeks ended November 3, 2018, as the inclusion of these awards would have been anti-dilutive.

Additionally, for the thirteen weeks ended November 2, 2019, approximately 0.4 million shares were 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 performance goals which have not been achieved as of November 2, 2019.

4. Fair Value Measurements

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.

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.

Financial Assets

The following table presents the Company’s financial assets, recorded in cash and cash equivalents on the unaudited Consolidated Balance Sheets, measured at fair value on a recurring basis as of November 2, 2019 and February 2, 2019, aggregated by the level in the fair value hierarchy within which those measurements fall.

			November 2, 2019
			Level 1						Level 2						Level 3
			(in thousands)
Money market funds			$	139,226					$	—					$	—
			February 2, 2019
			Level 1						Level 2						Level 3
			(in thousands)
Money market funds			$	155,014					$	—					$	—

The money market funds are valued using quoted market prices in active markets.

The carrying amounts reflected on the unaudited Consolidated Balance Sheets for the remaining cash and cash equivalents, receivables, prepaid expenses, and payables as of November 2, 2019 and February 2, 2019 approximated their fair values.

Non-Financial Assets

The Company’s non-financial assets, which include fixtures, equipment, improvements, right of use assets, and intangible assets, are not required to be measured at fair value on a recurring basis. However, if certain triggering events occur indicating the carrying value of these assets may not be recoverable, or annually in the case of indefinite-lived intangibles, an impairment test is required. The impairment test requires the Company to estimate the fair value of the assets and compare this to the carrying value of the assets. If the fair value of the asset is less than the carrying value, then an impairment charge is recognized, and the non-financial assets are recorded at fair value. The Company estimates the fair value using a discounted cash flow model or other fair value models as appropriate. Factors used in the evaluation include, but are not limited to, management’s plans for future operations, recent operating results, and projected cash flows. During the thirteen weeks ended November 2, 2019, the Company did not recognize any impairment charges. During the thirty-nine weeks ended November 2, 2019, the Company recognized impairment charges of approximately $2.3 million. During the thirteen and thirty-nine weeks ended November 3, 2018, the Company did not recognize any impairment charges. Impairment charges are recorded in cost of goods sold, buying and occupancy costs in the unaudited Consolidated Statements of Income and Comprehensive Income. 

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5. Intangible Assets

The following table provides the significant components of intangible assets:

			November 2, 2019
			Cost						Accumulated Amortization						Ending Net Balance
			(in thousands)
Tradename/domain names/trademarks			$	197,618					$	—					$	197,618
Licensing arrangements			425						356						69
			$	198,043					$	356					$	197,687

			February 2, 2019
			Cost						Accumulated Amortization						Ending Net Balance
			(in thousands)
Tradename/domain names/trademarks			$	197,618					$	—					$	197,618
Licensing arrangements			425						319						106
			$	198,043					$	319					$	197,724

The Company’s tradename, internet domain names, and trademarks have indefinite lives. Licensing arrangements are amortized over a period of ten years and are included in other assets on the unaudited Consolidated Balance Sheets.

In 2018, the Company performed a quantitative analysis and determined that no impairment was necessary on its intangible assets with indefinite lives. This analysis resulted in estimated fair values that exceeded the carrying values by a more than an insignificant amount; however, the estimated fair values decreased compared to the prior year due to decreased financial results. During the thirty-nine weeks ended November 2, 2019, the Company continued to experience negative comparable sales and a stock price below historic levels. The Company has evaluated whether these indicate a potential impairment of intangible assets with indefinite lives as of November 2, 2019. Additionally, the Company has considered, among other factors, the 2019 full year forecast, whether the results for the thirty-nine week period ended November 2, 2019 were consistent with the forecast, and expected future expense reductions. Based on these factors, the Company determined there were no events or circumstances that indicate it is more likely than not that the fair value of its intangible assets with indefinite lives is less than the carrying value. However, the intangible assets with indefinite lives are at risk of impairment if comparable sales continue to decline more than our expectations, future expense reductions are not achieved, or the Company does not meet its forecasted financial results.

6. Income Taxes

The provision for income taxes is based on a current estimate of the annual effective tax rate, adjusted to reflect the effect of discrete items. The Company’s effective income tax rate may fluctuate from quarter to quarter as a result of a variety of factors, including the estimate of annual pre-tax income, the related changes in the estimate, and the effect of discrete items. The impact of these items on the effective tax rate will be greater at lower levels of pre-tax earnings.

For 2019, the Company's estimated annual effective tax rate has fluctuated with small changes in the estimated full-year pre-tax income due to near break-even forecasted pre-tax earnings. Differences between pre-tax book and taxable income, such as non-deductible executive compensation, cause the effective income tax rate to vary significantly. Accordingly, the Company does not believe that it can estimate the annual effective tax rate for 2019 with sufficient precision and, as permitted by GAAP, has determined the income tax benefit for the thirty-nine weeks ended November 2, 2019 based upon year-to-date pre-tax loss and the effect of differences between book and taxable loss.

The Company’s effective tax rate was 48.1% and 21.7% for the thirteen weeks ended November 2, 2019 and November 3, 2018, respectively. The effective tax rate for the thirteen weeks ended November 2, 2019 reflects a $1.4 million change in estimate from the second quarter provision due to a change in the previously forecasted annual effective tax rate.

The Company’s effective tax rate was 11.9% and 33.0% for the thirty-nine weeks ended November 2, 2019 and November 3, 2018, respectively. The effective tax rate for the thirty-nine weeks ended November 2, 2019 reflects a tax benefit from a pre-tax loss offset by $2.6 million of discrete tax expense related to a tax shortfall for share-based compensation. The effective tax rate

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for the thirty-nine weeks ended November 3, 2018 reflects $1.3 million of discrete tax expense related to a tax shortfall for share-based compensation partially offset by a net discrete tax benefit of $0.6 million.

7. Leases

The Company leases all of its store locations and its corporate headquarters, which also includes its distribution center, under operating leases. The store leases typically have initial terms of 5 to 10 years. The current lease term for the corporate headquarters expires in 2026, with one optional five-year extension period. The Company also leases certain equipment and other assets under operating leases, typically with initial terms of 3 to 5 years. The lease term includes the initial contractual term as well as any options to extend the lease when it is reasonably certain that the Company will exercise that option. Leases with an initial term of 12 months or less (short-term leases) are not recorded on the balance sheet. The Company does not currently have any material short-term leases. The Company is generally obligated for the cost of property taxes, insurance and other landlord costs, including common area maintenance charges, relating to its leases. If these charges are fixed, they are combined with lease payments in determining the lease liability; however, if such charges are not fixed, they are considered variable lease costs and are expensed as incurred. The variable payments are not included in the measurement of the lease liability or asset. The Company’s finance leases are immaterial.

Certain lease agreements include rental payments based on a percentage of retail sales over contractual levels and others include rental payments adjusted periodically for inflation. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.

The following table is a summary of the Company’s components of net lease cost, which is included in cost of goods sold, buying and occupancy costs, on the unaudited Consolidated Statements of Income and Comprehensive Income:

									Thirty-Nine Weeks Ended
									November 2, 2019
									(in thousands)
Operating lease costs									$	206,672
Variable and short-term lease costs									53,375
Total lease costs									$	260,047

 

Supplemental cash flow information related to leases is as follows:

			Thirty-Nine Weeks Ended
			November 2, 2019
			(in thousands)
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows for operating leases			$	214,609
Right-of-use assets obtained in exchange for operating lease liabilities			$	11,491

Supplemental balance sheet information related to leases as of November 2, 2019 is as follows:

			Thirty-Nine Weeks Ended
			November 2, 2019
Operating leases:
Weighted average remaining lease term (in years)			5.8
Weighted average discount rate			4.8		%

The Company’s lease agreements do not provide an implicit rate, so the Company uses an estimated incremental borrowing rate, which is derived from third-party information available at the lease commencement date, in determining the present value of lease payments. The rate used is for a secured borrowing of a similar term as the lease.

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The following table reconciles the undiscounted cash flows for each of the first five years and total of the remaining years to the operating lease liabilities recorded on the unaudited Consolidated Balance Sheets as of November 2, 2019:

			November 2, 2019
			(in thousands)
2019 (remaining)			$	67,114
2020			272,902
2021			236,660
2022			217,736
2023			193,253
Thereafter			394,877
Total minimum lease payments			1,382,542
Less: amount of lease payments representing interest			223,556
Present value of future minimum lease payments			1,158,986
Less: current obligations under leases			222,439
Long-term lease obligations			$	936,547

As previously disclosed in the Company's Consolidated Financial Statements for the year ending February 2, 2019, future minimum lease payments for noncancelable operating leases, under the previous lease accounting standard, were as follows at February 2, 2019 (in thousands):

2019			$	221,816
2020			189,285
2021			163,748
2022			151,718
2023			135,345
Thereafter			290,790
Total			$	1,152,702

Lease Financing Obligations

Prior to the adoption of ASC 842, in certain lease arrangements, the Company was involved in the construction of the building. To the extent the Company was involved in the construction of structural improvements or took construction risk prior to commencement of a lease, it was deemed the owner of the project for accounting purposes. Therefore, the Company recorded 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 obligations 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 costs incurred by the landlord as of the balance sheet date.

The initial terms of the lease arrangements for which the Company was considered the owner are expected to expire in 2023 and 2029. The net book value of landlord-funded construction, replacement cost of pre-existing property, and capitalized interest in property and equipment on the unaudited Consolidated Balance Sheets was $56.6 million as of February 2, 2019. There was also $65.1 million of lease financing obligations as of February 2, 2019 in other long-term liabilities on the unaudited Consolidated Balance Sheets. These amounts were eliminated as part of the adoption of ASC 842.

Rent expense relating to the land was recognized on a straight-line basis. The Company did not report rent expense for the portion of the rent payment determined to be related to the buildings which were owned for accounting purposes. Rather, this

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portion of the rent payment under the lease was recognized as interest expense and a reduction of the lease financing obligations.

In February 2016, the Company amended its lease arrangement with the landlord of the Times Square Flagship store. The amendment provided the landlord with the option to cancel the lease upon sufficient notice through December 31, 2016. The option was never exercised and therefore expired on December 31, 2016. In conjunction with amending the lease, the Company recognized an $11.4 million put option liability that was being amortized through interest expense over the remaining lease term. As of February 2, 2019, the remaining balance related to the put option was $7.5 million of which $6.7 million was included within other long-term liabilities on the Consolidated Balance Sheets. These amounts were eliminated as part of the adoption of ASC 842.

8. Debt

A summary of the Company’s financing activities are as follows:

Revolving Credit Facility

On May 24, 2019, Express Holding, LLC, a wholly-owned subsidiary of the Company (“Express Holding”), and its subsidiaries entered into a First Amendment to the Second Amended and Restated $250.0 million Asset-Based Loan Credit Agreement (“Revolving Credit Facility”). The expiration date of the Revolving Credit Facility is May 24, 2024. As of November 2, 2019, there were no borrowings outstanding and approximately $247.3 million was available for borrowing under the Revolving Credit Facility.

Under the Revolving Credit Facility, revolving loans may be borrowed, repaid, and reborrowed until May 24, 2024, at which time all amounts borrowed must be repaid. Borrowings under the Revolving Credit Facility bear interest at a rate equal to either the rate published by ICE Benchmark Administration Limited (with a floor of 0%) (the “Eurodollar Rate”) plus an applicable margin rate or the highest of (1) Wells Fargo Bank, National Association’s prime lending rate (with a floor of 0%), (2) 0.50% per annum above the federal funds rate (with a floor of 0%) or (3) 1% above the Eurodollar Rate (the “Base Rate”), in each case plus an applicable margin rate. The applicable margin rate is determined based on excess availability as determined by reference to the borrowing base. The applicable margin rate for Eurodollar Rate-based advances is 1.25% or 1.50% and the applicable margin rate for Base Rate-based advances is 0.25% or 0.50%, in each case, based on the borrowing base. Under certain circumstances, a default interest rate will apply on any overdue amount payable under the Revolving Credit Facility during the existence of an event of default at a per annum rate equal to 2.00% above the applicable interest rate for any overdue principal and 2.0% above the rate applicable for Base Rate-based advances for any other overdue interest.

The unused line fee payable under the Revolving Credit Facility is incurred at 0.20% per annum of the average daily unused revolving commitment during each quarter, payable quarterly in arrears on the first day of each May, August, November, and February. In the event that (1) an event of default has occurred and is continuing or (2) excess availability plus eligible cash collateral is less than 10.0% of the borrowing base for 5 consecutive days, such unused line fees are payable on the first day of each month.

Interest payments under the Revolving Credit Facility are due quarterly on the first day of each May, August, November, and February for Base Rate-based advances, provided, however, in the event that (1) an event of default has occurred and is continuing or (2) excess availability plus eligible cash collateral is less than 10.0% of the borrowing base for 5 consecutive days, interest payments are due on the first day of each month. Interest payments under the Revolving Credit Facility are due on the last day of the interest period for Eurodollar Rate-based advances for interest periods of 1, 2, and 3 months, and additionally every 3 months after the first day of the interest period for Eurodollar Rate-based advances for interest periods of greater than 3 months.

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 10.0% of the borrowing base for 15 consecutive days. In addition, the Revolving Credit Facility contains customary covenants and restrictions on Express Holding’s 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, prepayment of other debt, distributions, dividends, the repurchase of capital stock, transactions with affiliates, the ability to change the nature of its business or fiscal year, and permitted business activities. 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, among other assets, substantially all working capital assets including cash, accounts receivable, and inventory of Express Holding and its domestic subsidiaries.

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Letters of Credit

The Company may enter into stand-by letters of credit (“stand-by LCs”) on an as-needed basis to secure payment obligations for merchandise purchases and other general and administrative expenses. As of November 2, 2019 and February 2, 2019, outstanding stand-by LCs totaled $2.7 million and $3.0 million, respectively.

9. 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. The Company issues shares of common stock from treasury stock upon exercise of stock options and vesting of restricted stock units, including those with performance conditions.

Share-Based Compensation Plans

In 2010, the Board approved, and the Company implemented, the Express, Inc. 2010 Incentive Compensation Plan (as amended, the "2010 Plan"). The 2010 Plan authorized the Compensation Committee (the "Committee") of the Board and its designees to offer eligible employees and directors cash and stock-based incentives as deemed appropriate in order to attract, retain, and reward such individuals.

As of April 30, 2018, upon the recommendation of the Committee, the Board unanimously approved and adopted, subject to stockholder approval, the Express, Inc. 2018 Incentive Compensation Plan (the “2018 Plan”) to replace the 2010 Plan. On June 13, 2018, stockholders of the Company approved the 2018 Plan and all grants made subsequent to that approval will be made under the 2018 Plan, other than inducement grants made under the NYSE listing standards, which do not require stockholder approval but are otherwise subject to the terms and conditions of the 2018 Plan. In the third quarter of 2019, in connection with updates made by the Company to its policy regarding the clawback of incentive compensation awarded to associates, the Board approved an amendment to the 2018 Plan, solely for the purpose of updating the language regarding the recoupment of an Award granted under the 2018 Plan.

The following summarizes share-based compensation expense:

			Thirteen Weeks Ended																		Thirty-Nine Weeks Ended
			November 2, 2019						November 3, 2018						November 2, 2019						November 3, 2018
			(in thousands)
Restricted stock units			$	2,088					$	3,015					$	6,417					$	9,347
Stock options			304						255						468						842
Performance-based restricted stock units			16						280						319						627
Total share-based compensation			$	2,408					$	3,550					$	7,204					$	10,816

The stock compensation related income tax benefit recognized by the Company during the thirteen and thirty-nine weeks ended November 2, 2019 was $0.1 million and $1.7 million, respectively. The stock compensation related income tax benefit recognized by the Company during the thirteen and thirty-nine weeks ended November 3, 2018 was negligible and $2.5 million, respectively.

Restricted Stock Units

During the thirty-nine weeks ended November 2, 2019, the Company granted restricted stock units (“RSUs”) under the terms of the 2018 Plan. The fair value of RSUs is determined based on the Company’s closing stock price on the day prior to the grant date in accordance with the 2018 Plan. The RSUs granted in 2019, in general, vest ratably over four years and the expense related to these RSUs will be recognized using the straight-line attribution method over this vesting period.

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The Company’s activity with respect to RSUs, including awards with performance conditions granted prior to 2018, for the thirty-nine weeks ended November 2, 2019 was as follows:

			Number of Shares			Grant Date Weighted Average Fair Value Per Share
			(in thousands, except per share amounts)
Unvested, February 2, 2019			3,064			$	8.95
Granted			3,830			$	3.70
Vested			(1,172)			$	10.17
Forfeited			(1,052)			$	6.43
Unvested, November 2, 2019			4,670			$	4.91

The total fair value of RSUs that vested during the thirty-nine weeks ended November 2, 2019 was $11.9 million. As of November 2, 2019, there was approximately $16.7 million of total unrecognized compensation expense related to unvested RSUs, which is expected to be recognized over a weighted-average period of approximately 1.8 years.

Stock Options

The Company’s activity with respect to stock options during the thirty-nine weeks ended November 2, 2019 was as follows:

			Number of Shares						Grant Date Weighted Average Exercise Price Per Share						Weighted-Average Remaining Contractual Life (in years)						Aggregate Intrinsic Value
			(in thousands, except per share amounts and years)
Outstanding, February 2, 2019			2,379						$	16.40
Granted			2,320						$	2.60
Exercised			—						$	—
Forfeited or expired			(642)						$	15.09
Outstanding, November 2, 2019			4,057						$	8.71					7.0						$	1,624
Expected to vest at November 2, 2019			2,268						$	2.97					9.6						$	1,517
Exercisable at November 2, 2019			1,634						$	17.25					3.3						$	—

The following provides additional information regarding the Company's stock options:

						Thirty-Nine Weeks Ended
						November 2, 2019
						(in thousands, except per share amounts)
Weighted average grant date fair value of options granted (per share)						$	1.25
Total intrinsic value of options exercised						$	—

As of November 2, 2019, there was approximately $2.6 million of total unrecognized compensation expense related to stock options, which is expected to be recognized over a weighted average period of approximately 1.9 years.

The Company uses the Black-Scholes-Merton option-pricing model to value stock options granted to employees. 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 award, expected term of the award, and dividend yield.

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The fair value of stock options was estimated at the grant date using the Black-Scholes-Merton option pricing model with the following weighted-average assumptions:

			Thirty-Nine Weeks Ended
			November 2, 2019
Risk-free interest rate (1)			1.93		%
Price volatility (2)			47.27		%
Expected term (years) (3)			6.29
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)Primarily based on the historical volatility of the Company's common stock over a period consistent with the expected term of the stock options.

(3)Calculated using the midpoint scenario, which combines historical exercise data with hypothetical exercise data for outstanding options. The Company believes this data currently represents the best estimate of the expected term of granted employee stock options.

(4)The Company does not currently plan on paying regular dividends.

Performance-based Restricted Stock Units

In the first quarter of 2018, the Company granted performance shares to a limited number of senior executive-level employees, which entitle these employees to receive a specified number of shares of the Company’s common stock upon vesting. The number of shares earned could range between 0% and 200% of the target amount depending upon performance achieved over a three-year vesting period. The performance conditions of the award include adjusted diluted earnings per share (EPS) targets and total shareholder return (TSR) of the Company’s common stock relative to a select group of peer companies. As of November 2, 2019, there were 0.2 million shares outstanding of the 2018 performance grant with a grant date fair value of $7.54 per share.

Cash-Settled Awards

In 2019 and 2018, the Company granted cash-settled awards to a limited number of senior executive-level employees. These awards are classified as liabilities, are valued based on the fair value of the award at the grant date and are remeasured at each reporting date until settlement with compensation expense being recognized in proportion to the completed requisite period up until date of settlement. The amount of cash earned could range between 0% and 200% of the target amount depending upon performance achieved over the three-year vesting period. The performance conditions of the award include EPS targets and TSR of the Company’s common stock relative to a select group of peer companies. A Monte Carlo valuation model is used to determine the fair value of the awards. As of November 2, 2019, $1.4 million of total unrecognized compensation cost is expected to be recognized on cash-settled awards over a weighted-average period of 2.1 years.

10. Commitments and Contingencies

In a complaint filed in January 2017 by Mr. Jorge Chacon in the Superior Court for the State of California for the County of Orange, certain subsidiaries of the Company were named as defendants in a representative action alleging violations of California state wage and hour statutes and other labor standards. The lawsuit seeks unspecified monetary damages and attorneys’ fees. In July 2018, former associate Ms. Christie Carr filed suit in Alameda County Superior Court for the State of California naming certain subsidiaries of the Company in a representative action alleging violations of California State wage and hour statutes and other labor standard violations. The lawsuit seeks unspecified monetary damages and attorneys’ fees. On January 28, 2019, Jorge Chacon filed a second representative action in the Superior Court for the State of California for the County of Orange alleging violations of California state wages and hour statutes and other labor standard violations. The lawsuit seeks unspecified monetary damages and attorneys' fees. The Company is vigorously defending itself against these claims and, as of November 2, 2019, has established an estimated liability based on its best estimate of the outcome of the matters.

The Company is subject to various other 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.

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11. Investment in Equity Interests

In 2016, the Company made a $10.1 million investment in Homage, LLC, a privately held retail company based in Columbus, Ohio. The non-controlling investment in the entity is being accounted for under the equity method. Under the terms of the agreement governing the investment, the Company’s investment was increased by $0.5 million during the second quarter of both 2018 and 2019, as the result of an accrual of a non-cash preferred yield. This investment is assessed for impairment whenever factors indicate an other than temporary loss in value. Factors providing evidence of such a loss include the fair value of an investment that is less than its carrying value, absence of an ability to recover the carrying value or the investee’s inability to generate income sufficient to justify the carrying value. As a result of this assessment in 2018, the Company determined the carrying value exceeded the fair value and recognized an $8.4 million impairment charge within other expense/(income), net in the Consolidated Statements of Income and Comprehensive Income. In addition, during the second quarter of 2019, the Company recognized an additional $0.5 million impairment charge within other expense/(income), net in the unaudited Consolidated Statements of Income and Comprehensive Income. The remaining $2.7 million investment, inclusive of the $1.5 million preferred yield, is included in other assets on the unaudited Consolidated Balance Sheets. The fair value of the equity method investment was determined based on applying income and market approaches. The income approach relied on the discounted cash flow method and the market approach relied on a market multiple approach considering historical and projected financial results.

12. Stockholders’ Equity

On November 28, 2017, the Board approved a new share repurchase program that authorized the Company to repurchase up to $150.0 million of the Company’s outstanding common stock using available cash (the “2017 Repurchase Program”). Under the 2017 Repurchase Program, the Company may repurchase shares on the open market, including through Rule 10b5-1 plans, in privately negotiated transactions, through block purchases, or otherwise in compliance with applicable laws, including Rule 10b-18 of the Securities Exchange Act of 1934, as amended. The timing and amount of stock repurchases will depend on a variety of factors, including business and market conditions as well as corporate and regulatory considerations. The share 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. In 2018, the Company repurchased 10.0 million shares of its common stock under the 2017 Repurchase Program for an aggregate amount equal to $83.2 million, including commissions. During the thirteen weeks ended November 2, 2019, the Company repurchased 2.8 million shares of its common stock under the 2017 Repurchase Program for an aggregate amount equal to $8.7 million, including commissions. During the thirty-nine weeks ended November 2, 2019, the Company repurchased 3.7 million shares of its common stock under the 2017 Repurchase Program for an aggregate amount equal to $13.6 million, including commissions. As of November 2, 2019, the Company had approximately $36.2 million remaining under this authorization. In addition, subsequent to November 2, 2019 through December 10, 2019, the Company repurchased an additional 0.6 million shares of its common stock under the 2017 Repurchase Program for an aggregate amount equal to $2.0 million, including commissions.

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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, 2019 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 leading fashion brand for women and men. Since 1980, Express has provided the latest apparel and accessories to help customers build a wardrobe for every occasion, offering fashion and quality at an attractive value. The Company operates more than 600 retail and factory outlet stores in the United States and Puerto Rico, as well as an online destination.

Q3 2019 vs. Q3 2018
•Net sales decreased 5.1% to $488.5 million •Comparable sales decreased 5% •Comparable retail sales (includes both retail stores and e-commerce sales) decreased 5% •Comparable outlet sales decreased 5% •Gross margin percentage decreased 250 basis points to 28.2% •Operating (loss)/income decreased $16.9 million to a loss of $6.7 million •Net (loss)/income decreased $11.1 million to a loss of $3.1 million •Diluted earnings per share (EPS) decreased $0.16 to a loss of $0.05

The following charts show key performance metrics for the third quarter of 2019 compared to the third quarter of 2018.

 

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Outlook & Third Quarter Update

As we move forward, we will be focused on four foundational elements: product, brand, customer and execution. While we expect our results to remain challenging in the near-term, we believe that by focusing on these foundational elements we have a significant opportunity to improve the trend of the business and return the business to long term profitable growth. The following defines each area and provides an update on each priority for the third quarter:

Product

Express was once seen as a fashion authority and a trusted resource to help customers build their wardrobe. We’ve lost some of that credibility due to product misses. While there are areas of strength in our women’s and men’s assortment, we need to be winning in key categories. To accomplish this, we have identified and taken action in the following areas during the quarter:

•Women’s Tops. We’ve had too much depth in older key items and not enough breadth and style diversity. We are conducting tests to understand the impact of optimizing our tops assortment by adding different colors, fabrics, prints and silhouettes and will apply these learnings going forward.

•Speed to market. In order to move faster and get more newness in our assortment, we have implemented a new InstaBuy process for both Women’s and Men’s. In addition, we have re-engineered our product development calendar to ensure we can deliver more newness, more often.

•Product categorization. We are rethinking the brand’s traditional approach to categorizing our product into four lifestyles based on wearing occasions. Our floorsets now reflect a more edited, integrated, modern approach and provide more inspiration for the customer. Moving forward we will offer more versatility to our customers in building their wardrobes.

Brand

We believe we have an opportunity to clarify our brand purpose and message and more closely connect it to our product strategy to tell our story in a more powerful and consistent way. We have begun work around the articulation of our brand as well as engaging our customers in different and more impactful ways.

Customer

We need to be more effective at retaining existing customers and attracting new ones. We are using a marketing mix model tool to assess where we are spending our marketing dollars and which channels deliver the best return on investment and we are also using multi-touch attribution tool to evaluate the real-time performance of our in-market messages and track the customer’s journey to purchase, both online and offline. In addition, we are enhancing our customer contact strategy with a more personalized approach to email and utilizing advanced analytics to help drive customer retention.

Execution

We need to deliver a better and more consistent experience across channels, and we must reduce our operating expenses. We are in the process of identifying cost savings opportunities, right sizing our expenses and finalizing our fleet rationalization plans. We are also focused on improving the performance of our brick and mortar stores by reducing time spent on non-selling activities and improving conversion and other metrics through improved merchandise flow and a better customer experience.

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Additionally, we have thoroughly assessed our go-to-market strategy and identified a number of opportunities for improvement that we plan to implement going forward, as well as working to right size our inventory and improve turns.

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, cost of goods sold, buying and occupancy costs, gross profit/gross margin, and selling, general, and administrative expenses. The following table describes and discusses these measures.

Financial Measures			Description			Discussion
Net Sales			Revenue from the sale of merchandise, less returns and discounts, as well as shipping and handling revenue related to e-commerce, revenue from the rental of our LED sign in Times Square, gift card breakage, revenue earned from our private label credit card agreement, and revenue earned from our franchise agreements.			Our business is seasonal, and we have historically realized a higher portion of our net sales in the third and fourth quarters, due primarily to the impact of the holiday season. Generally, approximately 45% of our annual net sales occur in the Spring season (first and second quarters) and 55% occur in the Fall season (third and fourth quarters).
Comparable Sales			Comparable sales is a measure of the amount of sales generated in a period relative to the amount of sales generated in the comparable prior year period. Comparable sales for the third quarter of 2019 were calculated using the 13-week period ended November 2, 2019 as compared to the 13-week period ended November 3, 2018. Comparable retail sales includes: •Sales from retail stores that were open 12 months or more as of the end of the reporting period •E-commerce sales Comparable outlet sales includes: •Sales from outlet stores that were open 12 months or more as of the end of the reporting period, including conversions Comparable sales excludes: •Sales from stores where the square footage has changed by more than 20% due to remodel or relocation activity •Sales from stores in a phased remodel where a portion of the store is under construction and therefore not productive selling space •Sales from stores where the store cannot open due to weather damage or other catastrophe			Our business and our comparable sales are 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.
Cost of goods sold, buying and occupancy costs			Includes the following: •Direct cost of purchased merchandise •Inventory shrink and other adjustments •Inbound and outbound freight •Merchandising, design, planning and allocation, and manufacturing/production costs •Occupancy costs related to store operations (such as rent and common area maintenance, utilities, and depreciation on assets) •Logistics costs associated with our e-commerce business			Our cost of goods sold typically increases in higher volume quarters because the direct cost of purchased merchandise is tied to sales. The primary drivers of the costs of individual goods are raw materials, labor in the countries where our merchandise is sourced, and logistics costs associated with transporting our merchandise. Buying and occupancy costs related to stores are largely fixed and do not necessarily increase as volume increases. Changes in the mix of products sold by type of product or by channel may also impact our overall cost of goods sold, buying and occupancy costs.

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Financial Measures			Description			Discussion
Gross Profit/Gross Margin			Gross profit is net sales minus cost of goods sold, buying and occupancy costs. Gross margin measures gross profit as a percentage of net sales.			Gross profit/gross margin is impacted by the price at which we are able to sell our merchandise and the cost of our product. 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 and have a direct effect on our gross margin. Any marked down merchandise that is not sold is marked-out-of-stock. We use third-party vendors to dispose of this marked-out-of-stock merchandise.
Selling, General, and Administrative Expenses			Includes operating costs not included in cost of goods sold, buying and occupancy costs such as: •Payroll and other expenses related to operations at our corporate offices •Store expenses other than occupancy costs •Marketing expenses, including production, mailing, print, and digital advertising costs, among other things			With the exception of store payroll, certain marketing expenses, and incentive compensation, selling, general, and administrative expenses generally do not vary proportionally with net sales. As a result, selling, general, and administrative expenses as a percentage of net sales are usually higher in lower volume quarters and lower in higher volume quarters.

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Results of Operations

The Third Quarter of 2019 compared to the Third Quarter of 2018

Net Sales

			Thirteen Weeks Ended
			November 2, 2019						November 3, 2018
Net sales (in thousands)			$	488,483					$	514,961
Comparable retail sales			(5)		%				1		%
Comparable outlet sales			(5)		%				(1)		%
Total comparable sales percentage change			(5)		%				—		%
Gross square footage at end of period (in thousands)			5,319						5,400
Number of:
Stores open at beginning of period			626						631
New retail stores			—						—
New outlet stores			6						5
Retail stores converted to outlets			(3)						(2)
Closed stores			(3)						—
Stores open at end of period			626						634

Net sales in the third quarter of 2019 decreased approximately $26.5 million compared to the third quarter of 2018. The decrease was primarily attributable to decreases in retail and outlet comparable sales. The decrease in retail comparable sales was the result of decreased traffic at our retail stores and a decrease in the number of transactions. In addition, our retail sales were negatively impacted by our decision to strategically reduce the number of store-wide and site-wide promotions. The decrease in our outlet comparable sales was the result of decreased traffic and a lower average selling price.

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Gross Profit

The following table shows cost of goods sold, buying and occupancy costs, gross profit in dollars, and gross margin percentage for the stated periods:

			Thirteen Weeks Ended
			November 2, 2019						November 3, 2018
			(in thousands, except percentages)
Cost of goods sold, buying and occupancy costs			$	350,810					$	356,812
Gross profit			$	137,673					$	158,149
Gross margin percentage			28.2		%				30.7		%

The 250 basis point decrease in gross margin percentage, or gross profit as a percentage of net sales, in the third quarter of 2019 compared to the third quarter of 2018 was comprised of a 140 basis point decrease in merchandise margin and a 110 basis point increase in buying and occupancy costs as a percentage of net sales. The decrease in merchandise margin was primarily driven by actions to move through clearance inventory and product that did not fit with our evolving product strategy. This was partially offset by being more strategic with our promotional activity during the quarter. The increase in buying and occupancy costs as a percentage of net sales was primarily the result of the decrease in sales.

Selling, General, and Administrative Expenses

The following table shows selling, general, and administrative expenses in dollars and as a percentage of net sales for the stated periods:

			Thirteen Weeks Ended
			November 2, 2019						November 3, 2018
			(in thousands, except percentages)
Selling, general, and administrative expenses			$	144,301					$	148,294
Selling, general, and administrative expenses, as a percentage of net sales			29.5		%				28.8		%

The $4.0 million decrease in selling, general, and administrative expenses in the third quarter of 2019 as compared to the third quarter of 2018 was the result of decreased store payroll of $2.1 million, marketing expenses of $2.0 million and home office payroll, including incentive and stock-based compensation, of $1.2 million. These decreases were partially offset by a $1.8 million increase in professional fees.

Income Tax (Benefit)/Expense

The following table shows income tax (benefit)/expense in dollars for the stated periods:

			Thirteen Weeks Ended
			November 2, 2019						November 3, 2018
			(in thousands)
Income tax (benefit)/expense			$	(2,880)					$	2,203

The effective tax rate was 48.1% for the thirteen weeks ended November 2, 2019 compared to 21.7% for the thirteen weeks ended November 3, 2018. The effective tax rate for the thirteen weeks ended November 2, 2019 reflects a $1.4 million change in estimate from the second quarter provision due to an increase from the previously forecasted annual effective tax rate. The effective tax rate, excluding discrete items, was 44.0% and 28.1% for the thirteen weeks ended November 2, 2019 and November 3, 2018, respectively. The effective tax rate in the third quarter of 2019 was higher than the statutory tax rate primarily due to the previously mentioned change in estimate from the second quarter provision. Refer to Note 6 in our unaudited Consolidated Financial Statements for further discussion regarding the method for determining the income tax benefit for the thirteen weeks ended November 2, 2019.

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The Thirty-Nine Weeks Ended November 2, 2019 compared to the Thirty-Nine Weeks Ended November 3, 2018

Net Sales

			Thirty-Nine Weeks Ended
			November 2, 2019						November 3, 2018
Net sales (in thousands)			$	1,412,469					$	1,487,918
Comparable retail sales			(7)		%				1		%
Comparable outlet sales			(3)		%				1		%
Total comparable sales percentage change			(6)		%				1		%
Gross square footage at end of period (in thousands)			5,319						5,400
Number of:
Stores open at beginning of period			631						635
New retail stores			—						—
New outlet stores			31						36
Retail stores converted to outlets			(27)						(29)
Closed stores			(9)						(8)
Stores open at end of period			626						634

Net sales during the thirty-nine weeks ended November 2, 2019 decreased approximately $75.4 million compared to the thirty-nine weeks ended November 3, 2018. The decrease was primarily attributable to decreases in retail and outlet comparable sales, offset in part by increases in non-comparable sales and other revenue in the thirty-nine weeks ended November 2, 2019 compared to the thirty-nine weeks ended November 3, 2018. The decrease in retail comparable sales was the result of decreased traffic at our retail and outlet stores, as well as increased promotional activity at our stores and on our website.

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Gross Profit

The following table shows cost of goods sold, buying and occupancy costs, gross profit in dollars, and gross margin percentage for the stated periods:

			Thirty-Nine Weeks Ended
			November 2, 2019						November 3, 2018
			(in thousands, except percentages)
Cost of goods sold, buying and occupancy costs			$	1,025,795					$	1,046,204
Gross profit			$	386,674					$	441,714
Gross margin percentage			27.4		%				29.7		%

The 230 basis point decrease in gross margin percentage, or gross profit as a percentage of net sales, in the thirty-nine weeks ended November 2, 2019 compared to the thirty-nine weeks ended November 3, 2018 was comprised of a 100 basis point decrease in merchandise margin and a 130 basis point increase in buying and occupancy costs as a percentage of net sales. The decrease in merchandise margin was primarily driven by valuation reserves on slow moving inventory and the actions we took during the first three quarters to sell through clearance inventory and inventory not aligned with our product strategy going forward. The reduction in store-wide and site-wide promotional activity in the latter half of the first quarter of 2019 that continued through the third quarter partially offset this decrease. The increase in buying and occupancy costs as a percentage of net sales was primarily the result of the decrease in sales.

Selling, General, and Administrative Expenses

The following table shows selling, general, and administrative expenses in dollars and as a percentage of net sales for the stated periods:

			Thirty-Nine Weeks Ended
			November 2, 2019						November 3, 2018
			(in thousands, except percentages)
Selling, general, and administrative expenses			$	415,391					$	426,583
Selling, general, and administrative expenses, as a percentage of net sales			29.4		%				28.7		%

The $11.2 million decrease in selling, general, and administrative expenses in the thirty-nine weeks ended November 2, 2019 as compared to the thirty-nine weeks ended November 3, 2018 was the result of decreased home office payroll, including incentive compensation, of $7.5 million. In addition, there was a decrease in marketing costs of $5.3 million. These decreases were partially offset by a $5.6 million increase in professional fees.

Income Tax (Benefit)/Expense

The following table shows income tax (benefit)/expense in dollars for the stated periods:

			Thirty-Nine Weeks Ended
			November 2, 2019						November 3, 2018
			(in thousands)
Income tax (benefit)/expense			$	(3,062)					$	5,268

The effective tax rate was 11.9% for the thirty-nine weeks ended November 2, 2019 compared to 33.0% for the thirty-nine weeks ended November 3, 2018. The effective tax rate for the thirty-nine weeks ended November 2, 2019 reflects a tax benefit from a pre-tax loss offset by $2.6 million of discrete tax expense related to a tax shortfall for share-based compensation. The effective tax rate for the thirty-nine weeks ended November 3, 2018 reflects $1.3 million of discrete tax expense related to a tax shortfall for share-based compensation. The effective tax rate, excluding discrete items, was 20.5% and 28.4% for the thirty-nine weeks ended November 2, 2019 and November 3, 2018, respectively. The effective tax rate for the current year is lower than the statutory tax rate primarily due to non-deductible executive compensation. Refer to Note 6 in our unaudited Consolidated Financial Statements for further discussion regarding the method for determining the income tax benefit for the thirty-nine weeks ended November 2, 2019.

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Non-GAAP Financial Measures

We supplement the reporting of our financial information determined under United States generally accepted accounting principles (GAAP) with certain non-GAAP financial measures: adjusted net loss, adjusted operating loss, and adjusted diluted earnings per share. We believe that these non-GAAP measures provide additional useful information to assist stockholders in understanding our financial results and assessing our prospects for future performance. Management believes adjusted net loss, adjusted operating loss, and adjusted diluted earnings per share are important indicators of our business performance because they exclude items that may not be indicative of, or are unrelated to, our underlying operating results, and provide a better baseline for analyzing trends in our business. In addition, adjusted diluted earnings per share is used as a performance measure in our long-term executive compensation program for purposes of determining the number of equity awards that are ultimately earned and adjusted operating loss is a metric used in our short-term cash incentive compensation plan. Because non-GAAP financial measures are not standardized, it may not be possible to compare these financial measures with other companies' non-GAAP financial measures having the same or similar names. These adjusted financial measures should not be considered in isolation or as a substitute for reported net loss, operating loss or diluted earnings per share. These non-GAAP financial measures reflect an additional way of viewing our operations that, when viewed with the GAAP results and the below reconciliations to the corresponding GAAP financial measures, provide a more complete understanding of our business. Management strongly encourages investors and stockholders to review our financial statements and publicly-filed reports in their entirety and not to rely on any single financial measure.

The tables below reconcile the non-GAAP financial measures, adjusted net loss, adjusted operating loss, and adjusted diluted earnings per share, with the most directly comparable GAAP financial measures, net loss, operating loss, and diluted earnings per share for the thirteen and thirty-nine weeks ended November 2, 2019.

			Thirteen Weeks Ended November 2, 2019
(in thousands, except per share amounts)			Operating Loss						Income Tax Impact						Net Loss						Diluted Earnings per Share						Weighted Average Diluted Shares Outstanding
Reported GAAP Measure			$	(6,675)											$	(3,105)					$	(0.05)					66,438
Impact of Executive Departures			1,716						(401)						1,315						0.02
Adjusted Non-GAAP Measure			$	(4,959)											$	(1,790)					$	(0.03)					66,438

			Thirty-Nine Weeks Ended November 2, 2019
(in thousands, except per share amounts)			Operating Loss						Income Tax Impact						Net Loss						Diluted Earnings per Share						Weighted Average Diluted Shares Outstanding
Reported GAAP Measure			$	(27,989)											$	(22,742)					$	(0.34)					66,845
Impact of CEO Departure			—						822			(a)			822						0.01
Impact of Executive Departures			1,716						(401)						1,315						0.02
Adjusted Non-GAAP Measure			$	(26,273)											$	(20,605)					$	(0.31)					66,845

(a)Represents the tax impact of the expiration of the former CEO's non-qualified stock options.

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Liquidity and Capital Resources

A summary of cash provided by or used in operating, investing, and financing activities is shown in the following table:

			Thirty-Nine Weeks Ended
						November 2, 2019						November 3, 2018
			(in thousands)
Provided by operating activities			$	32,834					$	18,315
Used in investing activities			(20,503)						(32,402)
Used in financing activities			(16,086)						(60,946)
Decrease in cash and cash equivalents			(3,755)						(75,033)
Cash and cash equivalents at end of period			$	167,915					$	161,189

Our business relies on cash flows from operations as our primary source of liquidity, with the majority of those cash flows being generated in the fourth quarter of the year. Our primary operating cash needs are for merchandise inventories, payroll, store rent and marketing. For the thirty-nine weeks ended November 2, 2019, our cash flows provided by operating activities were $32.8 million compared to $18.3 million provided by operating activities for the thirty-nine weeks ended November 3, 2018. This $14.5 million increase in cash flows from operating activities for the thirty-nine weeks ended November 2, 2019 was primarily driven by lower inventory purchases in 2019 and the timing of payments on accounts payable balances, partially offset by $33.5 million lower net income for the thirty-nine weeks ended November 2, 2019.

In addition to cash flows from operations, we have access to additional liquidity, if needed, through borrowings under our Revolving Credit Facility. As of November 2, 2019, we had $247.3 million available for borrowing under our Revolving Credit Facility. On May 24, 2019, we amended and restated our Revolving Credit Facility. The borrowing capacity under the facility remains at $250.0 million but the expiration date of the facility has been extended to May 24, 2024. Refer to Note 8 to our unaudited Consolidated Financial Statements for additional information on our Revolving Credit Facility.

We also use cash for capital expenditures and financing transactions. For the thirty-nine weeks ended November 2, 2019, we had capital expenditures of approximately $20.5 million. These relate primarily to store remodels, new outlet stores, and information technology projects to support our strategic business initiatives. We expect capital expenditures for the remainder of 2019 to be approximately $15.0 million to $18.0 million, primarily driven by store remodels and investments in information technology. These capital expenditures do not include the impact of landlord allowances, which are expected to be approximately $0.4 million for the remainder of 2019.

On November 28, 2017, the Board approved a new share repurchase program that authorizes us to repurchase up to $150.0 million of our outstanding common stock using available cash. During the thirty-nine weeks ended November 2, 2019 and the thirty-nine weeks ended November 3, 2018, we repurchased 3.7 million shares and 6.5 million shares under the share repurchase program, respectively, for aggregate amounts equal to $13.6 million and $56.2 million, including commissions, respectively. As of November 2, 2019, we had approximately $36.2 million remaining under the share repurchase program. In addition, subsequent to November 2, 2019 through December 10, 2019, the Company repurchased an additional 0.6 million shares of its common stock under the 2017 Repurchase Program for an aggregate amount equal to $2.0 million, including commissions.

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 three to five days of the related sale, and we 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 future operations and the availability of borrowings under our Revolving Credit Facility will be sufficient to meet working capital requirements and anticipated capital expenditures for at least the next 12 months.

Contractual Obligations

Our contractual obligations and other commercial commitments did not change materially between February 2, 2019 and November 2, 2019. For additional information regarding our contractual obligations as of February 2, 2019, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended February 2, 2019.

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Critical Accounting Policies

Management has determined that our most critical accounting policies are those related to revenue recognition, merchandise inventory valuation, long-lived asset valuation, claims and contingencies, and income taxes. We continue to monitor our accounting policies to ensure proper application of current rules and regulations. Other than the adoption of the new leasing standard discussed in Note 7 to our unaudited Consolidated Financial Statements, there have been no significant changes to the policies discussed in our Annual Report on Form 10-K for the year ended February 2, 2019.

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 thirty-nine weeks ended November 2, 2019. 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.

ITEM 4. CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) and 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 November 2, 2019.

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 third quarter of 2019 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 10 to our unaudited Consolidated Financial Statements included in Part I of this Quarterly Report and is incorporated herein by reference.

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ITEM 1A.RISK FACTORS.

In addition to the other information set forth in this Quarterly Report, careful consideration should be given to the risk factors set forth in “Item 1A. Risk Factors”, of our Annual Report on Form 10-K for the year ended February 2, 2019, any of which could materially affect our business, operations, financial position, stock price, or future results. The risks described herein and in our Annual Report on Form 10-K for the year ended February 2, 2019, are important to an understanding of the statements made in this Quarterly Report, in our other filings with the SEC, and in any other discussion of our business. These risk factors, which contain forward-looking information, should be read in conjunction with “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations”, and the unaudited Consolidated Financial Statements and related notes included in this Quarterly Report.

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 November 2, 2019:

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						Approximate Dollar Value of Shares that May Yet be Purchased under the Plans or Programs(2)
						(in thousands, except per share amounts)
August 4, 2019 - August 31, 2019						1						$	1.86					—						$	44,885
September 1, 2019 - October 5, 2019						1,535						$	2.99					1,535						$	40,316
October 6, 2019 - November 2, 2019						1,285						$	3.24					1,269						$	36,213
Total						2,821												2,804

⁽¹⁾ Includes shares purchased in connection with employee tax withholding obligations and shares issued under the 2010 Plan.

⁽²⁾ On November 28, 2017, the Board approved a share repurchase program that authorizes the Company to repurchase up to $150 million of the Company’s outstanding common stock using available cash. The Company may repurchase shares on the open market, including through Rule 10b5-1 plans, in privately negotiated transactions, through block purchases, or otherwise in compliance with applicable laws, including Rule 10b-18 of the Securities Exchange Act of 1934, as amended. The timing and amount of stock repurchases will depend on a variety of factors, including business and market conditions as well as corporate and regulatory considerations. The share 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 DISCLOSURES.

Not applicable.

ITEM 5.  OTHER INFORMATION.

None.

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ITEM 6. EXHIBITS.

Exhibits. The following exhibits are filed or furnished with this Quarterly Report:

Exhibit Number			Exhibit Description
10.1*			Amended and Restated Express, Inc. 2018 Incentive Compensation Plan.
10.2			Letter Agreement, dated as of September 23, 2019, between Express and Matthew Moellering (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K, filed with the SEC on September 23, 2019).
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 pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS*			Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document).
101.SCH*			Inline XBRL Taxonomy Extension Schema Document.
101.CAL*			Inline XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF*			Inline XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB*			Inline XBRL Taxonomy Extension Label Linkbase Document.
101.PRE*			Inline XBRL Taxonomy Extension Presentation Linkbase Document.
104*			Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).
* Filed herewith.

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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:

December 11, 2019

EXPRESS, INC.

By:

/s/ Periclis Pericleous

Periclis Pericleous

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

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