Express, Inc. (NYSE:EXPR) Q3 2022 Earnings Call Transcript

Express, Inc. (NYSE:EXPR) Q3 2022 Earnings Call Transcript December 8, 2022

Express, Inc. misses on earnings expectations. Reported EPS is $-0.5 EPS, expectations were $-0.29.

Operator: Good morning. My name is Chris, and I’ll be your conference operator today. I’d like to welcome everyone to the Express, Inc. Conference Call to discuss Third Quarter 2022 Earnings, as well as the partnership with WHP Global. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. Thank you. I now like to hand the call over to Greg Johnson, Vice President of Investor Relations. Please go ahead.

Greg Johnson: Thank you, Chris. Good morning, and welcome to the Express earnings conference call and webcast to discuss the announcement of our third quarter 2022 results, as well as our partnership with WHP Global. Our third quarter 2022 earnings release and presentation and the press release and presentation relating to the partnership with WHP Global can be found in the investor relations section of express.com. These items will be archived and our call will be available for replay. I’d like to open by reminding you of the company’s Safe Harbor provisions. Today’s call may contain forward-looking statements. Any statements made during this conference call, except those containing historical facts may be deemed to constitute forward-looking statements within the meaning of the federal securities laws.

Actual future results may differ materially from those suggested in forward-looking statements due to a number of risks and uncertainties, for a description of the risk that could cause our results to differ materially from those described in forward-looking statements. Please refer to our 2021 Form 10-K, third quarter Form 10-Q, and other filings with the SEC. These risks and uncertainties are further detailed in our earnings press release and the press release announcing the partnership with WHP that we issued this morning. These statements represent our current judgement and are subject to risks, assumptions, and uncertainties. Express assumes no obligation to update any forward-looking statements whether as a result of new information, future events, or otherwise, except as required by law.

We have two separate presentations on our investor relations website this morning. One for our third quarter 2022 earnings release and another standalone presentation for the partnership announcement. The consummation of the partnership is pending lender consent, regulatory approvals, and customary closing conditions. Our comments today will summarize the detailed information provided in both press releases and both investor presentations. In addition, we may refer to certain non-GAAP measures. You can locate a reconciliation of any non-GAAP measures discussed in our comments to amounts reported under GAAP in our earnings release. We will also be providing financial comparisons to prior fiscal periods and our prepared remarks today, refer to 2021 unless otherwise noted.

Please see explanatory notes in the earnings release for additional details regarding the definition of certain items. With me today are Tim Baxter, Chief Executive Officer; Matt Moellering, President and Chief Operating Officer; Jason Judd, Chief Financial Officer; and Yehuda Shmidman, CEO and Founder of WHP Global. I will now turn the call over to Tim.

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Tim Baxter: Thank you, Greg, and good morning, everyone. I’ll briefly review our third quarter results before turning to the strategic partnership with WHP Global that we announced this morning. Q3 was tougher than we anticipated and that is reflected in our results. The macroeconomic, consumer and competitive environments were extremely challenging and became more acute as the quarter progressed. Across the industry, we saw widespread aggressive promotional activity. Our strategy to elevate our brand through higher average unit retails and reduced store-wide and site-wide promotions, which has driven steady growth for the past five quarters, came up against the consumers reduced spending in discretionary categories and increased appetite for deep discounts.

At the same time, we had some misses in our women’s business that further impacted our performance. We did however post our sixth consecutive quarter of positive comps in our men’s business. Despite these results, we remain confident in our ability to achieve our stated goal of long-term profitable growth in the Express brand. We are already working to realign our assortments based on customer purchasing behavior, recalibrate our opening price points, and address opportunities in our women’s business. We are also taking decisive actions to right size our cost structure and improve our profitability. This morning, we also announced some incredibly exciting news. We have entered into a mutually transformative strategic partnership with WHP Global, a leading brand management firm to advance our EXPRESSway Forward strategy, scale our Express brand, and accelerate the growth of our company through brand acquisitions.

Through this partnership, we begin a bold new chapter, one that we expect will drive greater shareholder value. Let me talk you through the key components of this partnership. First, we will leverage our fully integrated omnichannel platform and operating expertise to acquire operate and grow multiple fashion brands. Second, we will establish an intellectual property joint venture with WHP to scale the Express brand through category and global licensing expansion. And third, we will immediately strengthen our balance sheet with $260 million in gross proceeds from the WHP investment. When combined, we expect these components will lead to accelerated long-term profitable growth and increased shareholder value. Let me provide some additional detail on each one.

First, our platform. This model furthers our transformation from a mall-based specialty retailer to a fully integrated omnichannel platform with the capability and reach to operate multiple brands. We expect to be well-positioned to take advantage of anticipated retail industry consolidation by pursuing brand acquisitions in partnership with WHP. Through these strategic acquisitions, we will leverage our platform to accelerate our growth, generate operating margin expansion, create cost savings, and drive profitability. Second, the intellectual property joint venture. This will enable us to scale our multi-billion dollar Express brands through new licensing agreements with international partners and in non-core categories. Today, the awareness and profile of the Express brand are larger than its category and geographic footprints.

And now, with the partnership, expertise, and reach of WHP, the intellectual property joint venture can help to unlock its untapped potential. To be clear, EXPR will continue to operate the Express brand in the U.S. exactly as we do today through a 100-year license agreement with the new intellectual property joint venture. I have said many times that we are transforming Express from being known as a store in the mall to a brand with a purpose powered by a styling community and that remains true going forward for the Express brand. Third, the balance sheet. WHP will invest a total of $260 million into this partnership. 25 million will be through a common equity pipe investment to acquire 5.4 million newly issued shares of Express common stock at $4.60 per share.

This represents an approximate proforma ownership of 7.4%. The intellectual property joint venture is valued at approximately $400 million. WHP will invest $235 million for a 60% stake and EXPR will maintain a 40% stake. These cash proceeds will strengthen our balance sheet allowing us to pursue compelling synergistic brand acquisition opportunities, upgrade our platform capabilities, and eliminate our high interest rate term loan. As we do so, we will maintain our disciplined approach to capital deployment. This is a bold and innovative partnership and realizing its full potential would only be possible with a highly experienced and equally committed partner. I have known Yehuda Shmidman, CEO and Founder of WHP Global for many years. I have great respect for the WHP model and their expertise and for Yehuda’s personal and professional integrity.

It is my pleasure to introduce Yehuda to tell you a little bit about WHP.

Yehuda Shmidman: Thank you, Tim. I’m very excited to be here with you today. First and foremost, I share your enthusiasm for our new partnership and I am 100% aligned with the vision you outlined. I believe strongly that it truly will be transformational for both of our companies. WHP Global is a leading brand management firm with significant capital backing and a strong portfolio of global consumer brands that includes TOYS”R”US, BABIES”R”US, ANNE KLEIN, JOSEPH ABBOUD, JOE’S JEANS, and more. Today, we have a global network of more than 125 licensees across North America, Asia, the Middle East, Europe, and Latin America, and we are thrilled to partner with EXPR as we look to leverage our expertise to help drive growth for both Express and new brands to be acquired in the future.

We believe that Express is an incredible brand with a powerful brand purpose and meaningful untapped growth potential, especially in major regions outside the U.S. Furthermore, our belief is that by aligning our respective capabilities, we can significantly enhance the value of our companies by growing Express together and by acquiring additional fashion brands in the future. On behalf of the entire WHP Global team, I’d like to thank Tim, Chairman of the Board, Mylle Mangum, the Board of Directors, the management team and all of the EXPR stakeholders. We are thrilled to join forces with the team and confident that we will accomplish great things together.

Tim Baxter: Thank you, Yehuda. Together, We partner a multi-billion dollar brand with high awareness and a steadily growing base of loyal customers with a forward thinking brand management company that has a proven track record of unlocking brand value on a global scale. Together, we build a portfolio of fashion brands and expect to deliver accelerated long-term growth. In addition to the mutual opportunities and benefits of this partnership, a number of industry dynamics makes us an opportune time for such a bold move. Over the last few years, the retail apparel industry has been negatively impacted by a scarcity of capital, high SG&A expenses, which have led to operating margin pressure and ever increasing expectations around the customer experience.

The financial results and pace of growth for our company and so many others in our sector have certainly been affected by these conditions. As I said earlier, we will continue to operate the Express brand in the U.S. just as we have been doing and we’ll build upon everything that is working. We will continue to drive growth in modern tailoring, denim, chinos and tops. Through our fleet optimization strategy we have had great results in our pilot stores. We’ve opened six new Express Edit concept stores in the last five months and will continue to drive growth here. Our UpWest brand had a remarkable quarter with sales up 40%. We opened our 14th store in SoHo, launched our first wholesale partnership with Nordstrom and will also continue to drive growth here.

UpWest remains separate from our partnership with WHP and will continue to operate as usual. The EXPRESSway Forward strategy is grounded in four foundational pillars: product, brand, customer, and execution. These are the fundamentals of any sound and scalable retail apparel business and every brand we bring into the fold in the future will be guided by our relentless commitment to putting products first, developing a relevant and compelling brand positioning, engaging existing customers, and attracting new ones, and ensuring seamless omnichannel execution. This mutually transformative strategic partnership with WHP will advance our EXPRESSway Forward strategy, scale our Express brand, provide WHP access to a fully integrated omnichannel operating platform, and accelerate the growth of both of our companies.

Through this partnership, we begin a bold new chapter and expect to drive greater value for our shareholders. I appreciate your interest in our company, and I’ll now turn the call back over to the operator for your questions.

Q&A Session

Operator: Thank you. Our first question is from Marni Shapiro with Retail Tracker. Your line is open.

Marni Shapiro: Hey, guys. Congratulations Yehuda. It’s so nice to hear your voice.

Yehuda Shmidman : Thank you, Marni. Good morning.

Marni Shapiro: Good morning. So, I guess a couple of questions. I do want to dive into just the quarter and the trends. You guys are one of the last to report. So, if you could talk a little bit just about your own trends, what was tough in the quarter? You mentioned that women‘s, you had a couple of misses. I’m curious also if you saw challenges in your denim business? And then if you could just talk a little bit more broadly about how you’re seeing the consumer respond to product to promotion? Is traffic down €“ your outlet stores were still flat. So, I’m curious what you’re seeing overall away from what you’re seeing specifically?

Tim Baxter: Absolutely. So, look, I think the quarter, as I said, the challenges in the quarter got more acute as the quarter progressed, which I think is very consistent with what we’ve heard from many of our competitors who reported earlier. And for us I think the challenges were somewhat different. We have, as I said, driven five consecutive quarters of growth over our pre-pandemic levels through elevating our average unit retails and reducing store-wide and site-wide promotions. So, those two things, you know, we’ve had average unit retails up in the teens for many quarters in a row. And those things Marni came in direct conflict with the consumers desire to spend less in discretionary categories and their desire for deeper discounts.

So, the strategy which has worked really very well for those five quarters, just really came in conflict with the consumer’s behavior and the consumer’s mindset. And so, the outlook that we provided for the year gives you some indication of how the fourth quarter is playing out. I would expect those same dynamics to be in play in the fourth quarter. That being said, I also mentioned, we had some misses in our women’s business and specifically in women’s tops. That is a category that as you know is one of the most price sensitive, it’s also one of the categories that drives the most new customers into the brand. And so, in that category in particular, I think we saw really increased pressure based on those market dynamics that I just described.

We also got a little out of balance. The versatility of our tops assortments and women’s wasn’t where it needed to be. And we are making those corrections and expect to have that business back on track as we move into the first quarter based on the corrections we’ve made. Yes, specifically about denim. I think Denim is certainly a category that has slowed, did slow throughout the third quarter where we were seeing tremendous growth in denim through the second quarter and where we were grabbing market share. On this call, last quarter, I talked about grabbing a tremendous amount of market share in denim. I’m fairly confident that we will still €“ when we see all the data that we still will have taken market share in denim, but it is not a category that’s driving growth right now.

In men’s, the denim business is being completely offset by our incredible chinos business, but in women’s, there doesn’t seem to be a casual bottoms offset to that drop that we’re experiencing in denim.

Marni Shapiro: And your women’s not buying cargoes and that kind of ?

Tim Baxter : Not yet. Not yet. The biggest success we’ve had in bottoms in women’s has been in the re-launch of our Editor pant, an iconic €“ obviously an iconic pant for us and you’ll see an expansion of that as we move into the first quarter, but she is not buying a cargo from us yet.