EXPR Q3 11 10Q
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
 
 
FORM 10-Q
 
 
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended October 29, 2011
OR
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______ TO ______
Commission File Number 001-34742
 
EXPRESS, INC.
(Exact name of registrant as specified in its charter)
 
Delaware
 
26-2828128
(State or other jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
1 Express Drive
Columbus, Ohio
 
43230
(Address of principal executive offices)
 
(Zip Code)
Telephone: (614) 474-4001
(Registrant’s telephone number, including area code)
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that such registrants were required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x   No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer
o
Accelerated filer
o
 
 
 
 
Non-accelerated filer
x  (Do not check if a smaller reporting company)
Smaller reporting company
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No  x
The number of outstanding shares of the registrant’s common stock was 88,908,602 as of November 30, 2011.

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

We derive many of our forward-looking statements from our operating budgets and forecasts, which are based upon many detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors and, it is impossible for us to anticipate all factors that could affect our actual results. For the discussion of these risks and other risks and uncertainties that could cause actual results to differ materially from those contained in our forward-looking statements, please refer to “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended January 29, 2011, filed with the Securities and Exchange Commission (“SEC”) on March 22, 2011. The forward-looking statements included in this Quarterly Report are made only as of the date hereof. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events, or otherwise, except as otherwise required by law.

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


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PART I – FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS.

EXPRESS, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in Thousands, Except Per Share Amounts)
(Unaudited)
 
October 29, 2011
 
January 29, 2011
ASSETS
 
 
 
CURRENT ASSETS:
 
 
 
Cash and cash equivalents
$
144,982

 
$
187,762

Receivables, net
7,869

 
9,908

Inventories
278,540

 
185,209

Prepaid minimum rent
22,792

 
22,284

Other
34,571

 
22,130

Total current assets
488,754

 
427,293

 
 
 
 
PROPERTY AND EQUIPMENT
504,542

 
448,109

Less: accumulated depreciation
(280,759
)
 
(236,790
)
Property and equipment, net
223,783

 
211,319

 
 
 
 
TRADENAME/DOMAIN NAME
197,474

 
197,414

DEFERRED TAX ASSETS
3,933

 
5,513

OTHER ASSETS
16,205

 
21,210

Total assets
$
930,149

 
$
862,749

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
CURRENT LIABILITIES:
 
 
 
Accounts payable
$
187,973

 
$
85,843

Deferred revenue
18,335

 
25,067

Accrued bonus
6,523

 
14,268

Accrued expenses
91,595

 
91,792

Accounts payable and accrued expenses – related parties
4,207

 
79,865

Total current liabilities
308,633

 
296,835

 
 
 
 
LONG-TERM DEBT
316,906

 
366,157

OTHER LONG-TERM LIABILITIES
86,531

 
69,595

Total liabilities
712,070

 
732,587

 
 
 
 
COMMITMENTS AND CONTINGENCIES (Note 12)

 

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

 

Common stock – $0.01 par value; 500,000 shares authorized; 88,968 shares and 88,736 shares issued at October 29, 2011 and January 29, 2011, respectively and 88,909 shares and 88,696 shares outstanding at October 29, 2011 and January 29, 2011, respectively
888

 
887

Additional paid-in capital
85,034

 
77,318

Accumulated other comprehensive loss

 

Retained earnings
132,260

 
51,957

Treasury stock – at average cost; 59 shares and 40 shares at October 29, 2011 and January 29, 2011, respectively
(103
)
 

Total stockholders’ equity
218,079

 
130,162

Total liabilities and stockholders’ equity
$
930,149

 
$
862,749

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
 
October 29,
2011
 
October 30,
2010
 
October 29,
2011
 
October 30,
2010
NET SALES
$
486,784

 
$
450,577

 
$
1,400,202

 
$
1,284,316

COST OF GOODS SOLD, BUYING, AND OCCUPANCY COSTS
310,816

 
286,254

 
896,088

 
832,770

Gross profit
175,968

 
164,323

 
504,114

 
451,546

OPERATING EXPENSES:
 
 
 
 
 
 
 
Selling, general, and administrative expenses
115,061

 
111,309

 
342,236

 
325,155

Other operating expense (income), net
34

 
799

 
(166
)
 
17,844

Total operating expenses
115,095

 
112,108

 
342,070

 
342,999

 
 
 
 
 
 
 
 
OPERATING INCOME
60,873

 
52,215

 
162,044

 
108,547

 
 
 
 
 
 
 
 
INTEREST EXPENSE
6,328

 
7,570

 
27,843

 
51,699

INTEREST INCOME
(2
)
 
(1
)
 
(7
)
 
(12
)
OTHER INCOME, NET
(148
)
 
(62
)
 
(148
)
 
(1,968
)
INCOME BEFORE INCOME TAXES
54,695

 
44,708

 
134,356

 
58,828

INCOME TAX EXPENSE (BENEFIT)
22,025

 
18,407

 
54,053

 
(20,148
)
NET INCOME
$
32,670

 
$
26,301

 
$
80,303

 
$
78,976

 
 
 
 
 
 
 
 
OTHER COMPREHENSIVE INCOME:
 
 
 
 
 
 
 
Foreign currency translation
2

 

 

 

COMPREHENSIVE INCOME
$
32,672

 
$
26,301

 
$
80,303

 
$
78,976

 
 
 
 
 
 
 
 
Pro forma income before income taxes (Note 11)
 
 
 
 
 
 
$
58,828

Pro forma income tax expense (Note 11)
 
 
 
 
 
 
23,932

Pro forma net income (Note 11)
 
 
 
 
 
 
$
34,896

 
 
 
 
 
 
 
 
EARNINGS PER SHARE:
 
 
 
 
 
 
 
Basic
$
0.37

 
$
0.30

 
$
0.91

 
$
0.94

Diluted
$
0.37

 
$
0.30

 
$
0.90

 
$
0.93

 
 
 
 
 
 
 
 
WEIGHTED AVERAGE SHARES OUTSTANDING (Note 1):
 
 
 
 
 
 
 
Basic
88,643

 
88,340

 
88,573

 
84,352

Diluted
88,903

 
88,680

 
88,838

 
85,173

 
 
 
 
 
 
 
 
PRO FORMA EARNINGS PER SHARE (Note 11):
 
 
 
 
 
 
 
Basic
 
 
 
 
 
 
$
0.41

Diluted
 
 
 
 
 
 
$
0.41

 
 
 
 
 
 
 
 
PRO FORMA WEIGHTED AVERAGE SHARES OUTSTANDING (Note 11):
 
 
 
 
 
 
 
Basic
 
 
 
 
 
 
84,352

Diluted
 
 
 
 
 
 
85,173

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
 
October 29,
2011
 
October 30,
2010
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
80,303

 
$
78,976

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
51,198

 
51,483

Loss on disposal of property and equipment
89

 
1,453

Change in fair value of interest rate swap

 
(1,968
)
Share-based compensation
7,483

 
4,411

Non-cash loss on extinguishment of debt
2,744

 
8,781

Deferred taxes
(2,764
)
 
(32,527
)
Changes in operating assets and liabilities:
 
 
 
Receivables, net
2,043

 
(2,288
)
Inventories
(93,325
)
 
(68,629
)
Accounts payable, deferred revenue, and accrued expenses
9,008

 
(716
)
Accounts payable and accrued expenses – related parties
1,160

 
6,682

Other assets and liabilities
6,404

 
5,199

Net cash provided by operating activities
64,343

 
50,857

 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Capital expenditures
(55,915
)
 
(41,950
)
Purchase of intangible assets
(60
)
 

Net cash used in investing activities
(55,975
)
 
(41,950
)
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Borrowings under Senior Notes

 
246,498

Net proceeds from equity offering

 
166,898

Repayments of long-term debt arrangements
(50,087
)
 
(300,938
)
Costs incurred in connection with debt arrangements and Senior Notes
(1,192
)
 
(12,124
)
Costs incurred in connection with equity offering

 
(6,498
)
Proceeds from share-based compensation
234

 

Repurchase of common stock
(103
)
 

Repayment of notes receivable

 
5,633

Distributions

 
(261,000
)
Net cash used in financing activities
(51,148
)
 
(161,531
)
 
 
 
 
EFFECT OF EXCHANGE RATES ON CASH

 

 
 
 
 
NET DECREASE IN CASH AND CASH EQUIVALENTS
(42,780
)
 
(152,624
)
CASH AND CASH EQUIVALENTS, Beginning of period
187,762

 
234,404

CASH AND CASH EQUIVALENTS, End of period
$
144,982

 
$
81,780

See notes to unaudited consolidated financial statements.

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Notes to Unaudited Consolidated Financial Statements
(unaudited)

1. Description of Business and Basis of Presentation

Business Description

Express, Inc. (the "Company" or "Express") is a specialty apparel and accessories retailer of women's and men's merchandise, targeting the 20 to 30 year old customer. Express merchandise is sold through the Company's retail stores and website. As of October 29, 2011, Express operated 607 primarily mall-based stores in the United States, Canada, and Puerto Rico. Additionally, the Company earns royalties from 7 stores in the Middle East operated through a development agreement ("Development Agreement") with Alshaya Trading Co. ("Alshaya"). Under the Development Agreement, Alshaya operates stores that sell Express-branded apparel and accessories purchased directly from a wholly-owned subsidiary of 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. All references herein to "2011" and "2010" represent the 52-week periods ended January 28, 2012 and January 29, 2011, respectively. All references herein to “the third quarter of 2011” and “the third quarter of 2010” represent the thirteen weeks ended October 29, 2011 and October 30, 2010, respectively.

Basis of Presentation

In connection with the initial public offering of the Company's common stock ("IPO") on May 12, 2010, Express Parent LLC ("Express Parent") converted into a Delaware corporation and changed its name from Express Parent LLC to Express, Inc. This conversion was effective May 2, 2010 for tax purposes. In connection with this conversion, all of the equity interests in Express Parent, which consisted of Class L, Class A, and Class C units, were converted into shares of the Company's common stock at a ratio of 0.702, 0.649, and 0.442, respectively. The accounting effects of the recapitalization, collectively referred to as the "Reorganization", are reflected retrospectively for all periods presented in the unaudited Consolidated Financial Statements.

Express owns all of the outstanding equity interests in Express Topco LLC ("Express Topco"), which owns all of the outstanding equity interests in Express Holding LLC ("Express Holding"). Express Holding owns all of the outstanding equity interests in Express, LLC and Express Finance Corp. ("Express Finance"). Express, LLC conducts the operations of the Company and was a division of Limited Brands until it was acquired by an affiliate of Golden Gate Private Equity, Inc. ("Golden Gate") in 2007 (the "Golden Gate Acquisition"). Express Finance was formed on January 28, 2010, solely for the purpose of serving as co-issuer of the 8 3/4% Senior Notes ("Senior Notes") issued on March 5, 2010 and described in Note 9.

The accompanying unaudited Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, the accompanying unaudited Consolidated Financial Statements reflect all adjustments (which are of a normal recurring nature) necessary to present 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 2011. Therefore, these statements should be read in conjunction with the Consolidated Financial Statements and Notes thereto for the year ended January 29, 2011, included in the Company's Annual Report on Form 10-K, filed with the SEC.

Principles of Consolidation

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

2. Recently Issued Accounting Pronouncements

In May 2011, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” ASU No. 2011-04 clarifies and changes the application of various fair value measurement principles and disclosure requirements and will be effective for the Company in the first quarter of 2012. The Company has assessed the updated guidance and expects adoption to have no impact on its consolidated financial position or

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results of operations.

In June 2011, the FASB issued ASU No. 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income.” ASU No. 2011-05 requires presentation of the components of net income and other comprehensive income either as one continuous statement or as two consecutive statements and eliminates the option to present components of other comprehensive income as part of the statement of changes in stockholders' equity. ASU No. 2011-05 will be effective for the Company in the first quarter of 2012. The Company has assessed the guidance and expects adoption to have no impact on its consolidated financial position or results of operations.

3. Segment Reporting

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

The following is information regarding the Company's major product classes and sales channels:
 
Thirteen Weeks Ended
 
Thirty-Nine Weeks Ended
 
October 29, 2011
 
October 30, 2010
 
October 29, 2011
 
October 30, 2010
Classes:
(in thousands)
 
(in thousands)
Apparel
$
440,792

 
$
408,574

 
$
1,267,240

 
$
1,161,368

Accessories and other
41,542

 
38,147

 
118,696

 
111,500

Other revenue
4,450

 
3,856

 
14,266

 
11,448

Total net sales
$
486,784

 
$
450,577

 
$
1,400,202

 
$
1,284,316

 
Thirteen Weeks Ended
 
Thirty-Nine Weeks Ended
 
October 29, 2011
 
October 30, 2010
 
October 29, 2011
 
October 30, 2010
Channels:
(in thousands)
 
(in thousands)
Stores
$
436,683

 
$
414,278

 
$
1,264,653

 
$
1,185,821

E-commerce
45,651

 
32,443

 
121,283

 
87,047

Other revenue
4,450

 
3,856

 
14,266

 
11,448

Total net sales
$
486,784

 
$
450,577

 
$
1,400,202

 
$
1,284,316

Other revenue consists primarily of shipping and handling revenue related to e-commerce activity, gift card breakage, and royalties from the Development Agreement.
 
4. Earnings Per Share

The weighted-average shares used to calculate basic and diluted earnings per share for the thirty-nine weeks ended October 30, 2010 have been retroactively adjusted based on the Reorganization (see Note 1).
The following table provides a reconciliation between basic and diluted earnings per share:
 
Thirteen Weeks Ended October 29, 2011
 
Thirteen Weeks Ended October 30, 2010
(in thousands, except per share amounts)
Net
Income
 
Weighted
Average
Shares
 
Per
Share
Amount
 
Net
Income
 
Weighted
Average
Shares
 
Per
Share
Amount
Basic EPS
$
32,670

 
88,643

 
$
0.37

 
$
26,301

 
88,340

 
$
0.30

Effect of dilutive securities:
 
 
 
 
 
 
 
 
 
 
 
Restricted shares, restricted stock units, and stock options

 
260

 

 

 
340

 

Diluted EPS
$
32,670

 
88,903

 
$
0.37

 
$
26,301

 
88,680

 
$
0.30


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Thirty-Nine Weeks Ended October 29, 2011
 
Thirty-Nine Weeks Ended October 30, 2010
(in thousands, except per share amounts)
Net
Income
 
Weighted
Average
Shares
 
Per
Share
Amount
 
Net
Income
 
Weighted
Average
Shares
 
Per
Share
Amount
Basic EPS
$
80,303

 
88,573

 
$
0.91

 
$
78,976

 
84,352

 
$
0.94

Effect of dilutive securities:
 
 
 
 
 
 
 
 
 
 
 
Restricted shares, restricted stock units, and stock options

 
265

 
(0.01
)
 

 
821

 
(0.01
)
Diluted EPS
$
80,303

 
88,838

 
$
0.90

 
$
78,976

 
85,173

 
$
0.93

Stock options and restricted stock units to purchase 2.0 million and 2.3 million shares of common stock were not included in the computation of diluted EPS for the thirteen and thirty-nine weeks ended October 29, 2011, respectively, as to do so would have been anti-dilutive. Stock options to purchase 1.3 million shares of common stock were not included in the computation for the thirteen and thirty-nine weeks ended October 30, 2010, as to do so would have been anti-dilutive.
 
5. Fair Value of Financial Assets and Liabilities

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.
The following table presents the Company's assets measured at fair value on a recurring basis as of October 29, 2011 and January 29, 2011, respectively, aggregated by level in the fair value hierarchy within which those measurements fall.
 
October 29, 2011
 
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
 
Significant
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
 
(in thousands)
U.S. treasury securities funds
$
123,063

 
$

 
$

 
$
123,063

 
 
 
 
 
 
 
 
 
January 29, 2011
 
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
 
Significant
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
 
(in thousands)
U.S. treasury securities funds
$
168,929

 
$

 
$

 
$
168,929

The carrying amounts reflected on the unaudited Consolidated Balance Sheets for cash, cash equivalents, receivables, prepaid expenses, and payables approximated their fair values as of October 29, 2011 and January 29, 2011.








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6. Intangible Assets
The significant components of intangible assets are as follows:
 
October 29, 2011
 
January 29, 2011
 
Gross
Amount
 
Accumulated
Amortization
 
Gross
Amount
 
Accumulated
Amortization
 
(in thousands)
Tradename
$
196,144

 
$

 
$
196,144

 
$

Internet domain name/other
1,330

 

 
1,270

 

Net favorable lease obligations
19,750

 
(15,831
)
 
19,750

 
(14,449
)
Credit card relationships & customer lists
4,766

 
(4,766
)
 
4,766

 
(4,317
)
 
$
221,990

 
$
(20,597
)
 
$
221,930

 
$
(18,766
)
The Company's tradename and internet domain name have indefinite lives. Net favorable lease obligations, credit card relationships, and customer lists have finite lives and are amortized over a period of up to 7 years, 4 years, and 2 years, respectively, and are included in other assets on the unaudited Consolidated Balance Sheets. Amortization expense totaled $0.4 million and $1.8 million during the thirteen and thirty-nine weeks ended October 29, 2011, respectively; and $0.9 million and $3.0 million during the thirteen and thirty-nine weeks ended October 30, 2010, respectively.

7. Related Party Transactions
Transactions with Limited Brands

On July 29, 2011, Limited Brands divested its remaining ownership in the Company and, as a result of this disposition, Limited Brands and their affiliates were no longer related parties as of the end of the second quarter of 2011. The 2011 related party activity with Limited Brands and their affiliates described below includes only those expenses transacted prior to Limited Brands' disposition of the Company's common stock. 
 
The Company incurred charges from affiliates of Limited Brands, including Mast Global Logistics ("Mast"), for various transaction services, including home office rent, which is included in selling, general, and administrative expenses. The costs of merchandise sourcing services and logistics services, including distribution center rent, are included in cost of goods sold, buying, and occupancy costs. The amounts included in the unaudited Consolidated Statements of Income and Comprehensive Income are as follows:
 
 
Thirteen Weeks Ended
 
Thirty-Nine Weeks Ended
 
 
October 30, 2010
 
October 29, 2011
 
October 30, 2010
 
 
(in thousands)
 
(in thousands)
Merchandise Sourcing
 
$
119,058

 
$
198,162

 
$
309,959

Transaction and Logistics Services
 
$
13,855

 
$
24,788

 
$
44,397

The Company’s outstanding liability related to merchandise sourcing and transaction and logistics services provided by Limited Brands, including Mast, included in accounts payable and accrued expenses – related parties on the unaudited Consolidated Balance Sheets was $68.3 million and $8.6 million, respectively, as of January 29, 2011.
Prior to the IPO, under the Limited Liability Company Agreement of Express Parent ("LLC Agreement"), Limited Brands was entitled to receive a cash payment at the same time payments were made under an advisory agreement with Golden Gate ("Advisory Agreement") equal to the product of (i) the amount of the fees actually paid in cash under the Advisory Agreement and (ii) the quotient of the number of units held by Limited Brands over the number of units held by Golden Gate at the time of payment of such Advisory Agreement fees. Effective May 12, 2010, the LLC Agreement, including the advisory arrangement with Limited Brands, was terminated in connection with the Company’s conversion to a corporation and IPO. The Company paid Limited Brands a one-time termination fee of $3.3 million in the second quarter of 2010 in connection with the termination of the LLC Agreement and has made no payments subsequent to this termination.
The Company incurred the following charges from Limited Brands related to advisory fees and the termination of the LLC Agreement. These charges are included in other operating expense (income), net, in the unaudited Consolidated Statements of Income and Comprehensive Income:

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Thirty-Nine Weeks Ended
 
October 29, 2011
 
October 30, 2010
 
(in thousands)
Limited Brands LLC Agreement Fee (including termination fee)
$

 
$
4,156

As a result of the termination of the LLC Agreement, the Company had no financial obligation to Limited Brands related to this agreement as of October 29, 2011 or January 29, 2011.
Transactions with Golden Gate
In connection with the Golden Gate Acquisition, the Company entered into an Advisory Agreement with Golden Gate that was originally scheduled to expire in July 2017. Pursuant to the Advisory Agreement, the Company paid Golden Gate an annual management fee equal to the greater of (i) $2.0 million per fiscal year or (ii) 3% of adjusted EBITDA of Express Holding. Additionally, the Company reimbursed Golden Gate for reasonable out-of-pocket expenses incurred as a result of providing on-going advisory services. Effective May 12, 2010, the Advisory Agreement was terminated in connection with the Company’s conversion to a corporation and IPO. The Company paid Golden Gate a one-time termination fee of $10.0 million in the second quarter of 2010 in connection with the termination of the Advisory Agreement and has made no payments subsequent to this termination.
The Company incurred the following charges from Golden Gate related to advisory fees, out-of-pocket expenses, and the termination of the Advisory Agreement. These charges are included in other operating expense (income), net in the unaudited Consolidated Statements of Income and Comprehensive Income:
 
Thirty-Nine Weeks Ended
 
October 29, 2011
 
October 30, 2010
 
(in thousands)
Advisory fees and out-of-pocket expenses (including Advisory Agreement termination fee)
$

 
$
12,752

As a result of the termination of the Advisory Agreement, the Company had no financial obligation to Golden Gate related to this agreement as of October 29, 2011 or January 29, 2011.
Transactions with Other Golden Gate Affiliates
The Company also transacts with affiliates of Golden Gate for e-commerce warehouse and fulfillment services, software license purchases, and consulting and software maintenance services. The Company incurred the following charges, included primarily in cost of goods sold, buying, and occupancy costs in the unaudited Consolidated Statements of Income and Comprehensive Income:
 
Thirteen Weeks Ended
 
Thirty-Nine Weeks Ended
 
October 29, 2011
 
October 30, 2010
 
October 29, 2011
 
October 30, 2010
 
(in thousands)
 
(in thousands)
E-commerce warehouse and fulfillment
$
7,305

 
$
1,153

 
$
21,209

 
$
6,315

Software licenses and maintenance and consulting
$
55

 
$
33

 
$
198

 
$
259

In March 2010, the Company elected to prepay its e-commerce service provider, a Golden Gate affiliate, $10.2 million for services from April 2010 through January 2011 in exchange for a discount on those services. This prepaid amount was expensed as services were rendered with $3.0 million and $7.0 million being included primarily in cost of goods sold, buying, and occupancy costs in the unaudited Consolidated Statements of Income and Comprehensive Income during the thirteen and thirty-nine weeks ended October 30, 2010, respectively. The prepaid balance related to this Golden Gate affiliate was fully amortized as of January 29, 2011.
The Company’s outstanding liability to other Golden Gate affiliates, included in accounts payable and accrued expenses - related parties on the unaudited Consolidated Balance Sheets, was $4.2 million and $3.0 million as of October 29, 2011 and

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January 29, 2011, respectively.
In December 2009, the Company began providing real estate services to multiple Golden Gate affiliates. Income recognized for these services during the thirteen and thirty-nine weeks ended October 29, 2011 was $0.1 million and $0.4 million, respectively. Income recognized for these services during the thirteen and thirty-nine weeks ended October 30, 2010 was $0.1 million and $0.3 million, respectively. The Company's receivable balance related to these services was $0.1 million as of October 29, 2011 and January 29, 2011.
As part of the prepayment in full of the 14.5% Topco Term C Loan ("Term C Loan") in February 2010, an affiliate of Golden Gate received a payment consisting of $50.0 million of principal, $0.6 million of interest, and a $1.0 million prepayment penalty. As part of the prepayment in full of the 13.5% Topco Term B Loan ("Term B Loan") in May 2010, an affiliate of Golden Gate received a payment consisting of $58.3 million of principal, $2.1 million of interest, and a $3.5 million prepayment penalty. Total interest expense on the Term C Loan and Term B Loan, collectively referred to as the "Topco Credit Facility", attributed to Golden Gate affiliates was $2.7 million during the thirty-nine weeks ended October 30, 2010. The Company did not incur any interest expense under the Topco Credit Facility during the thirteen and thirty-nine week periods ended October 29, 2011 due to the termination of the Topco Credit Facility in the first half of 2010.

During the first and second quarters of 2011, the Company repurchased $25.0 million and $24.2 million of the Senior Notes, respectively, in open market transactions. Of the $49.2 million of Senior Notes repurchased, $40.0 million were held by a Golden Gate affiliate, leaving $10.0 million of Senior Notes owned by a Golden Gate affiliate outstanding as of October 29, 2011. Interest expense incurred on the Senior Notes attributable to the Golden Gate affiliate was $0.2 million and $1.5 million during the thirteen and thirty-nine weeks ended October 29, 2011, respectively; and $1.1 million and $3.0 million during the thirteen and thirty-nine weeks ended October 30, 2010, respectively.

8. Income Taxes

Prior to May 2, 2010, the Company was treated as a partnership for federal income tax purposes, and therefore had not been subject to federal and state income tax (subject to exception in a limited number of state and local jurisdictions). On May 12, 2010, the Company elected to be treated as a corporation under Subchapter C of Chapter 1 of the United States Internal Revenue Code, effective May 2, 2010 and was therefore subject to federal and state tax expense beginning May 2, 2010.
The Reorganization, for tax purposes, was deemed a contribution by Express Parent of its assets and liabilities to the Company, followed by the liquidation of Express Parent. The Reorganization resulted in a taxable gain to Express Parent. Except in those few jurisdictions where Express Parent was taxed directly, the taxable gain flowed through to the members due to Express Parent's partnership tax treatment. The taxable gain correspondingly increased the tax basis in the assets acquired by the Company in the Reorganization. Also, as a result of the Reorganization, the Company had a liability due to a management holding company totaling $0.8 million as of January 29, 2011. The Company settled this liability by making a final cash payment during the first quarter of 2011. Additionally, the Company had a net liability of $3.5 million comprised of a $4.8 million gross liability payable to a Golden Gate entity and a $1.3 million gross receivable due from taxing authorities. The Company settled the liability due to Golden Gate by making a final cash payment during the second quarter of 2011.
The provision for income taxes is based on a current estimate of the annual effective tax rate adjusted to reflect the impact of discrete items.  The Company's quarterly effective tax rate does not reflect a benefit associated with losses related to certain foreign subsidiaries. The Company's effective tax rate was 40.3% and 41.2% for the thirteen weeks ended October 29, 2011 and October 30, 2010, respectively.
The Company's effective tax rate was 40.2% and (34.2)% for the thirty-nine weeks ended October 29, 2011 and October 30, 2010, respectively. The increase in the effective rate is primarily a result of the Company's conversion to a corporation in connection with its IPO in the second quarter of 2010 and the recognition of a one-time tax benefit of $31.8 million in conjunction with the corporate reorganization.
The Company recorded a valuation allowance against the deferred tax assets arising from the net operating loss of foreign subsidiaries.  As of October 29, 2011 and January 29, 2011, the valuation allowance was approximately $0.3 million and $0.1 million, respectively. No other valuation allowances have been provided for deferred tax assets because management believes that it is more-likely-than-not that the full amount of the net deferred tax assets will be realized in the future.
The Company does not expect material adjustments to the total amount of unrecognized tax benefits within the next twelve months, but the outcome of tax matters is uncertain and unforeseen results can occur.


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9. Debt
Borrowings outstanding consisted of the following:
 
October 29, 2011
 
January 29, 2011
 
(in thousands)
Opco Term Loan
$
119,688

 
$
120,625

8 3/4% Senior Notes
200,850

 
250,000

Debt discount on Senior Notes
(2,382
)
 
(3,218
)
Total debt
318,156

 
367,407

Short term portion of debt
(1,250
)
 
(1,250
)
Total long-term debt
$
316,906

 
$
366,157


Opco Revolving Credit Facility
On July 29, 2011, Express Holding and its domestic subsidiaries entered into an Amended and Restated $200.0 million secured Asset-Based Loan Credit Agreement (the "Opco Revolving Credit Facility"). The Opco Revolving Credit Facility amended, restated, and extended the existing $200.0 million asset-based revolving credit facility, which was scheduled to expire on July 6, 2012. In connection with the amendment, the Company incurred $1.2 million of debt issuance costs that is being amortized on a straight-line basis through July 2016.
The Opco Revolving Credit Facility is scheduled to expire on July 29, 2016 and allows for up to $30.0 million of swing line advances and up to $45.0 million to be available in the form of letters of credit. Borrowings under the Opco Revolving Credit Facility bear interest at a rate equal to either the rate appearing on Bloomberg L.P.'s Page BBAM1/(Official BBA USD Dollar Libor Fixings) (the “Eurodollar Rate”) plus an applicable margin rate or the highest of (1) the prime lending rate, (2) 0.50% per annum above the federal funds rate and (3) 1% above the Eurodollar 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 for Eurodollar Rate-based advances is 1.50%, 1.75%, or 2.00% if excess availability is greater than or equal to 66% of the borrowing base, less than 66% of the borrowing base but greater than or equal to 33% of the borrowing base, or less than 33% of the borrowing base, respectively. The applicable margin rate for base rate-based advances is 0.50%, 0.75%, or 1.00% if excess availability is greater than or equal to 66% of the borrowing base, less than 66% of the borrowing base but greater than or equal to 33% of the borrowing base, or less than 33% of the borrowing base, respectively. The borrowing base components are 90% of credit card receivables plus 90% of the liquidation value of eligible inventory plus 100% of borrowing base-eligible cash collateral (not to exceed 20% of the borrowing base) less certain reserves.
The unused line fee payable under the Opco Revolving Credit Facility is incurred at 0.375% 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 or (2) excess availability plus eligible cash collateral is less than 12.5% of the borrowing base for five consecutive days, such unused line fees are payable on the first day of each month.
Interest payments under the Opco 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 or (2) excess availability plus eligible cash collateral is less than 12.5% of the borrowing base for five consecutive days, interest payments are due on the first day of each month. Interest payments under the Opco Revolving Credit Facility are due on the last day of the interest period for Eurodollar Rate-based advances for interest periods of one, two, and three months, and additionally every three months after the first day of the interest period for Eurodollar Rate-based advances for interest periods of greater than three months.
The Opco Revolving Credit Facility requires Express Holding and its domestic subsidiaries to maintain a fixed charge coverage ratio of at least 1.0:1.0 if excess availability plus eligible cash collateral is less than 10% of the borrowing base for 15 consecutive days. In addition, the Opco Revolving Credit Facility contains customary covenants and restrictions on Express Holding and its subsidiaries' activities, including, but not limited to, limitations on the incurrence of additional indebtedness; liens, negative pledges, guarantees, investments, loans, asset sales, mergers, acquisitions, and prepayment of other debt; distributions, dividends, and the repurchase of capital stock; transactions with affiliates; the ability to change the nature of its business or its fiscal year; the ability to amend the terms of the $125.0 million variable rate term loan ("Opco Term Loan"); and

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permitted activities of Express Holding. All obligations under the Opco Revolving Credit Facility are guaranteed by Express Holding and its domestic subsidiaries (that are not borrowers) and secured by a lien on substantially all of the assets of Express Holding and its domestic subsidiaries, provided that the liens on certain assets of Express Holding and its domestic subsidiaries are junior in priority to the liens securing the Opco Term Loan.
In connection with amending and restating the existing $200.0 million asset-based revolving credit facility, the Company recognized a $0.3 million loss on extinguishment of debt attributed to the write-off of unamortized debt issuance costs for the thirty-nine weeks ended October 29, 2011, which was recorded as interest expense in the unaudited Consolidated Statements of Income and Comprehensive Income and represents a non-cash adjustment to reconcile net income to net cash provided by operating activities within the unaudited Consolidated Statements of Cash Flows.
As of October 29, 2011, there were no borrowings outstanding and approximately $198.2 million available under the Opco Revolving Credit Facility.
Senior Notes

On March 5, 2010, Express, LLC and Express Finance co-issued, in a private placement, $250.0 million of 8 3/4% Senior Notes due 2018 at an offering price of 98.599% of the face value. An affiliate of Golden Gate purchased $50.0 million of Senior Notes in the offering.

In connection with the Senior Notes offering, Express, LLC and Express Finance entered into a registration rights agreement, which required Express, LLC and Express Finance to use commercially reasonable efforts to register notes having substantially identical terms as the Senior Notes with the SEC. On September 27, 2010, Express, LLC and Express Finance exchanged $200.0 million of the unregistered Senior Notes for registered Senior Notes having substantially identical terms as the unregistered Senior Notes.

During the first and second quarters of 2011, Express, LLC repurchased $25.0 million and $24.2 million of the Senior Notes, respectively, in open market transactions. Of the $49.2 million of Senior Notes repurchased, $40.0 million were held by a Golden Gate affiliate, leaving $10.0 million of unregistered Senior Notes held by a Golden Gate affiliate outstanding as of October 29, 2011. Express, LLC received a written waiver from the Golden Gate affiliate in regards to the requirement to register the remaining $10.0 million of Senior Notes.

Loss on Extinguishment

In connection with the Senior Notes repurchases in the first and second quarters of 2011, the Company recognized a $6.9 million loss on extinguishment of debt which was recorded as interest expense in the unaudited Consolidated Statements of Income and Comprehensive Income. Of this loss on extinguishment, the premium on the repurchases represented $4.4 million. The remaining loss on extinguishment was attributable to the unamortized debt issuance costs and unamortized discount write-offs totaling $2.5 million. The unamortized debt issuance costs and unamortized discount write-offs are presented as a non-cash adjustment to reconcile net income to net cash provided by operating activities within the unaudited Consolidated Statements of Cash Flows.

Fair Value of Debt
The fair value of the Opco Term Loan was estimated using quoted market prices for similar debt issues. The fair value of the Senior Notes was determined using quoted market prices. As of October 29, 2011, the fair value of the Opco Term Loan and Senior Notes was $129.3 million and $209.9 million, respectively.
Letters of Credit

The Company periodically enters into various trade letters of credit ("trade LCs") in favor of certain vendors to secure merchandise. These trade LCs are issued for a defined period of time, for specific shipments, and generally expire 3 weeks after the merchandise shipment date. As of October 29, 2011 and January 29, 2011, there were no outstanding trade LCs. Additionally, the Company enters into stand-by letters of credit ("stand-by LCs") on an as-needed basis to secure merchandise and fund other general and administrative costs. As of October 29, 2011 and January 29, 2011, outstanding stand-by LCs totaled $1.8 million.



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10. Share-Based Compensation

The following summarizes our share-based compensation expense:
 
Thirteen Weeks Ended
 
Thirty-Nine Weeks Ended
 
October 29, 2011
 
October 30, 2010
 
October 29, 2011
 
October 30, 2010
 
(in thousands)
 
(in thousands)
Stock options
$
1,669

 
$
723

 
$
4,798

 
$
1,341

Restricted stock units and restricted stock
1,049

 
28

 
2,529

 
50

Restricted shares (Pre-IPO)
12

 
90

 
156

 
3,020

Total share-based compensation
$
2,730

 
$
841

 
$
7,483

 
$
4,411


Stock Options
During the thirty-nine weeks ended October 29, 2011, the Company granted stock options under the Express, Inc., 2010 Incentive Compensation Plan (the "2010 Plan"). The majority of the options granted vest 25% per year over 4 years and have a 10 year contractual life.
The Company's activity with respect to stock options for the thirty-nine weeks ended October 29, 2011 was as follows:
 
 
Number of
Shares 
 
Grant Date
Weighted Average
Exercise Price
 
Weighted-Average Remaining Contractual Life
 
Aggregate Intrinsic Value
 
(in thousands, except per share amounts and years)
Outstanding, January 29, 2011
1,383

 
$
16.94

 
 
 
 
Granted
1,433

 
$
18.72

 
 
 
 
Exercised
(14
)
 
$
17.00

 
 
 
 
Forfeited
(59
)
 
$
17.26

 
 
 
 
Outstanding, October 29, 2011
2,743

 
$
17.86

 
9.0

 
$
14,211

Expected to vest as of October 29, 2011
2,389

 
$
17.97

 
9.0

 
$
12,125

Exercisable as of October 29, 2011
305

 
$
16.96

 
8.5

 
$
1,857

The following provides additional information regarding the Company's stock options:
 
Thirty-Nine Weeks Ended
 
October 29, 2011
 
October 30, 2010
 
(in thousands, except per share amounts)
Weighted average grant date fair value of options granted
$
9.96

 
$
9.19

Total intrinsic value of options exercised
$
77

 
$

As of October 29, 2011, there was $19.1 million of 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 for valuation of stock options granted to employees and directors. The Company's determination of the fair value of stock options is affected by the Company's stock price as well as a number of subjective and complex assumptions. These assumptions include the Company's expected stock price volatility over the term of the awards, expected term of the awards, dividend yield, and risk-free interest rate.

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

 
 
Thirty-Nine Weeks Ended
 
 
October 29, 2011
 
October 30, 2010
Risk-free interest rate (1)
 
1.39
%
 
2.84
%
Price Volatility (2)
 
55
%
 
54
%
Expected term (years) (3)
 
6.25

 
6.25

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)
As the Company's stock has a limited history of being publicly traded, this was based on the historical volatility of selected comparable companies over a period consistent with the expected term of the stock options. Comparable companies were selected primarily based on industry, stage of life cycle, and size.
(3)
Calculated utilizing the “simplified” methodology prescribed by Staff Accounting Bulletin No. 107 due to the lack of historical exercise data necessary to provide a reasonable basis upon which to estimate the term.
(4)
Based on the fact that the Company does not currently plan on paying regular dividends.

Restricted Stock Units and Restricted Stock

During the thirty-nine weeks ended October 29, 2011, the Company granted restricted stock units (“RSUs”) and restricted stock under the 2010 Plan. The fair value of the RSUs and restricted stock is determined based on the Company's stock price on the date of grant. The Company's activity with respect to RSUs and restricted stock for the thirty-nine weeks ended October 29, 2011 was as follows:  
 
Number of
Shares 
 
Grant Date
Weighted Average
Fair Value 
 
(in thousands, except per share amounts)
Unvested, January 29, 2011
44

 
$
4.88

Granted
926

 
$
18.93

Vested
(14
)
 
$
7.67

Forfeited
(10
)
 
$
15.14

Unvested, October 29, 2011
946

 
$
18.49

The total fair value of RSUs and restricted stock that vested during the thirty-nine weeks ended October 29, 2011 was $0.1 million. No RSUs or restricted stock vested during 2010. As of October 29, 2011, there was $14.7 million of unrecognized compensation expense related to unvested RSUs and restricted stock, which is expected to be recognized over a weighted average period of approximately 2.2 years.
Restricted Shares (Pre-IPO)
The Company's activity with respect to restricted shares for the thirty-nine weeks ended October 29, 2011 was as follows:
 
 
Number of
Shares 
 
Grant Date
Weighted Average
Fair Value 
 
(in thousands, except per share amounts)
Unvested, January 29, 2011
220

 
$
1.03

Granted

 
$

Vested
(173
)
 
$
1.07

Repurchased
(11
)
 
$
0.90

Unvested, October 29, 2011
36

 
$
0.90

The total fair value of restricted shares that vested during the thirty-nine weeks ended October 29, 2011 and October 30, 2010

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was $0.2 million and $2.9 million, respectively.
As of October 29, 2011, there was less than $0.1 million of unrecognized compensation expense related to unvested restricted shares, which is expected to be recognized over a weighted average period of approximately 0.6 years.

11. Pro forma Information
The pro forma net income applied in computing pro forma earnings per share for the thirty-nine weeks ended October 30, 2010 is based on the Company’s historical net income as adjusted to reflect the Company’s conversion to a corporation as if it had occurred as of the beginning of 2010. In connection with the Reorganization, effective May 2, 2010, the Company became taxed as a corporation. The Company was previously treated as a partnership for tax purposes, and therefore generally not subject to federal income tax. The pro forma net income includes adjustments for income tax expense as if the Company had been a corporation at an assumed combined federal, state, and local income tax rate of 40.9% for the first quarter of 2010. The pro forma net income for the thirty-nine weeks ended October 30, 2010 also eliminates the non-cash deferred tax benefit of $31.8 million as a non-recurring item related to the Reorganization (see Note 1).

12. Commitments and Contingencies

Express was named as a defendant in a purported class action lawsuit alleging various California state labor law violations. The complaint was originally filed on February 18, 2009, and amended complaints were subsequently filed. To avoid the expense and uncertainty of further litigation with respect to this matter, on March 31, 2011, the Company entered into a settlement agreement to resolve all claims of the plaintiff and other similarly situated class members that were asserted or could have been asserted based on the factual allegations in the final amended complaint for the case. In September 2011, the court granted final approval of the settlement, and in November 2011, the Company paid all amounts due under the settlement. The accrual was adjusted to the actual payment amount in the unaudited Consolidated Balance Sheet as of October 29, 2011. The adjustment was not material to the financial statements.

In a complaint filed on July 7, 2011, Express was named as a defendant in a purported nationwide class action lawsuit alleging violations of the Fair Labor Standards Act and of applicable state wage and hour statutes related to alleged off-the-clock work. The lawsuit seeks unspecified monetary damages and attorneys' fees. Express is vigorously defending these claims. At this time, Express is not able to predict the outcome of this lawsuit or the amount of any loss that may arise from it.

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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13. Guarantor Subsidiaries
On March 5, 2010, Express, LLC and Express Finance (the “Subsidiary Issuers”), both wholly-owned indirect subsidiaries of the Company, issued the Senior Notes. The Company (“Guarantor”) and certain of the Company’s indirect wholly-owned subsidiaries (“Guarantor Subsidiaries”) have guaranteed, on a joint and several basis, the Company’s obligations under the Senior Notes. The guarantees are not full and unconditional because Guarantor Subsidiaries can be released and relieved of their obligations under certain circumstances contained in the indenture governing the Senior Notes. These circumstances include the following, so long as other applicable provisions of the indenture are adhered to: any sale or other disposition of all or substantially all of the assets of any Guarantor Subsidiary, any sale or other disposition of capital stock of any Guarantor Subsidiary, or designation of any restricted subsidiary that is a Guarantor Subsidiary as an unrestricted subsidiary.
The following consolidating schedules present the condensed financial information on a combined basis.


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13. Guarantor Subsidiaries (continued)

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

 
October 29, 2011
 
Express, Inc.
 
Subsidiary
Issuers
 
Guarantor
Subsidiaries
 
Other
Subsidiaries
 
Eliminations
 
Consolidated
Total
Assets
 
 
 
 
 
 
 
 
 
 
 
Current assets
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
1,616

 
$
143,020

 
$

 
$
346

 
$

 
$
144,982

Receivables, net

 
6,547

 

 
1,322

 

 
7,869

Inventories

 
276,430

 

 
2,110

 

 
278,540

Prepaid minimum rent

 
22,632

 

 
160

 

 
22,792

Intercompany receivable

 
6,327

 
16,669

 

 
(22,996
)
 

Other
17

 
34,548

 

 
6

 

 
34,571

Total current assets
1,633

 
489,504

 
16,669

 
3,944

 
(22,996
)
 
488,754

Property and equipment, net

 
221,239

 

 
2,544

 

 
223,783

Tradename/domain name

 
197,474

 

 

 

 
197,474

Investment in subsidiary
215,063

 
1,196

 

 
209,560

 
(425,819
)
 

Deferred tax asset
968

 
2,072

 

 
893

 


 
3,933

Other assets

 
16,201

 

 
4

 

 
16,205

Total assets
$
217,664

 
$
927,686

 
$
16,669

 
$
216,945

 
$
(448,815
)
 
$
930,149

Liabilities and stockholders’ equity
 
 
 
 
 
 
 
 
 
 
 
Current liabilities
 
 
 
 
 
 
 
 
 
 
 
Accounts payable
$

 
$
187,690

 
$

 
$
283

 
$

 
$
187,973

Deferred revenue

 
4,968

 
13,356

 
11

 

 
18,335

Accrued bonus

 
6,520

 

 
3

 

 
6,523

Accrued expenses
(577
)
 
96,618

 

 
(4,446
)
 

 
91,595

Accounts payable and accrued expenses—related parties

 
4,207

 

 

 

 
4,207

Intercompany payable

 
16,669

 

 
6,327

 
(22,996
)
 

Total current liabilities
(577
)
 
316,672

 
13,356

 
2,178

 
(22,996
)
 
308,633

Long-term debt

 
316,906

 

 

 

 
316,906

Other long-term liabilities
162

 
84,548

 

 
1,821

 

 
86,531

Total liabilities
(415
)
 
718,126

 
13,356

 
3,999

 
(22,996
)
 
712,070

Commitments and Contingencies (Note 12)
 
 
 
 
 
 
 
 
 
 
 
Total stockholders’ equity
218,079

 
209,560

 
3,313

 
212,946

 
(425,819
)
 
218,079

Total liabilities and stockholders’ equity
$
217,664

 
$
927,686

 
$
16,669

 
$
216,945

 
$
(448,815
)
 
$
930,149


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13. Guarantor Subsidiaries (continued)

EXPRESS, INC.
CONDENSED CONSOLIDATING BALANCE SHEET
(Amounts in Thousands)
(Unaudited)
 
 
January 29, 2011
 
Express, Inc.
 
Subsidiary
Issuers
 
Guarantor
Subsidiaries
 
Other
Subsidiaries
 
Eliminations
 
Consolidated
Total
Assets

 

 

 

 

 

Current assets

 

 

 

 

 

Cash and cash equivalents
$
1,647

 
$
186,115

 
$

 
$

 
$

 
$
187,762

Receivables, net

 
9,908

 

 

 

 
9,908

Inventories

 
185,209

 

 

 

 
185,209

Prepaid minimum rent

 
22,284

 

 

 

 
22,284

Intercompany receivable

 

 
26,029

 
311

 
(26,340
)
 

Other

 
22,130

 

 

 

 
22,130

Total current assets
1,647

 
425,646

 
26,029

 
311

 
(26,340
)
 
427,293

Property and equipment, net

 
211,319

 

 

 

 
211,319

Tradename/domain name

 
197,414

 

 

 

 
197,414

Investment in subsidiary
127,260

 
3,147

 

 
121,757

 
(252,164
)
 

Deferred tax asset
968

 
3,652

 

 
893

 

 
5,513

Other assets

 
21,210

 

 

 

 
21,210

Total assets
$
129,875

 
$
862,388

 
$
26,029

 
$
122,961

 
$
(278,504
)
 
$
862,749

Liabilities and stockholders’ equity

 

 

 

 

 

Current liabilities

 

 

 

 

 

Accounts payable
$

 
$
85,843

 
$

 
$

 
$

 
$
85,843

Deferred revenue

 
2,185

 
22,882

 

 

 
25,067

Accrued bonus

 
14,268

 

 

 

 
14,268

Accrued expenses
(444
)
 
96,535

 

 
(4,299
)
 

 
91,792

Accounts payable and accrued expenses—related parties

 
79,865

 

 

 

 
79,865

Intercompany payable

 
26,340

 

 

 
(26,340
)
 

Total current liabilities
(444
)
 
305,036

 
22,882

 
(4,299
)
 
(26,340
)
 
296,835

Long-term debt

 
366,157

 

 

 

 
366,157

Other long-term liabilities
157

 
69,438

 

 

 

 
69,595

Total liabilities
(287
)
 
740,631

 
22,882

 
(4,299
)
 
(26,340
)
 
732,587

Commitments and Contingencies (Note 12)

 

 

 

 

 

Total stockholders’ equity
130,162

 
121,757

 
3,147

 
127,260

 
(252,164
)
 
130,162

Total liabilities and stockholders’ equity
$
129,875

 
$
862,388

 
$
26,029

 
$
122,961

 
$
(278,504
)
 
$
862,749


20

Table of Contents

13. Guarantor Subsidiaries (continued)

EXPRESS, INC.
CONDENSED CONSOLIDATING STATEMENT OF INCOME AND COMPREHENSIVE INCOME
(Amounts in Thousands)
(Unaudited)
 
 
Thirteen Weeks Ended October 29, 2011
 
Express, Inc.
 
Subsidiary
Issuers
 
Guarantor
Subsidiaries
 
Other
Subsidiaries
 
Eliminations
 
Consolidated
Total
Net sales
$

 
$
485,837

 
$

 
$
947

 
$

 
$
486,784

Cost of goods sold, buying, and occupancy costs

 
309,172

 

 
1,644

 

 
310,816

Gross profit

 
176,665

 

 
(697
)
 

 
175,968

Selling, general, and administrative expenses
252

 
113,425

 
(44
)
 
1,428

 

 
115,061

Other operating expense (income), net

 
34

 

 

 

 
34

Operating income (loss)
(252
)
 
63,206

 
44

 
(2,125
)
 

 
60,873

Interest expense

 
6,328

 

 

 

 
6,328

Interest income

 
(2
)
 

 

 

 
(2
)
(Income) loss in subsidiary
(32,927
)
 
1,931

 

 
(32,927
)
 
63,923

 

Other income, net

 

 

 
(148
)
 

 
(148
)
Income (loss) before income taxes
32,675

 
54,949

 
44

 
30,950

 
(63,923
)
 
54,695

Income tax expense (benefit)
3

 
22,022

 

 

 

 
22,025

Net income (loss)
$
32,672

 
$
32,927

 
$
44

 
$
30,950

 
$
(63,923
)
 
$
32,670

 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation

 

 

 
2

 

 
2

Comprehensive income
$
32,672

 
$
32,927

 
$
44

 
$
30,952

 
$
(63,923
)
 
$
32,672


21

Table of Contents

13. Guarantor Subsidiaries (continued)

EXPRESS, INC.
CONDENSED CONSOLIDATING STATEMENT OF INCOME AND COMPREHENSIVE INCOME
(Amounts in Thousands)
(Unaudited)
 
 
Thirteen Weeks Ended October 30, 2010
 
Express, Inc.
 
Subsidiary
Issuers
 
Guarantor
Subsidiaries
 
Other
Subsidiaries
 
Eliminations
 
Consolidated
Total
Net sales
$

 
$
450,577

 
$

 
$

 
$

 
$
450,577

Cost of goods sold, buying, and occupancy costs

 
286,254

 

 

 

 
286,254

Gross profit

 
164,323

 

 

 

 
164,323

Selling, general, and administrative expenses
322

 
111,042

 
(55
)
 

 

 
111,309

Other operating expense (income), net

 
799

 

 

 

 
799

Operating income (loss)
(322
)
 
52,482

 
55

 

 

 
52,215

Interest expense

 
7,570

 

 

 

 
7,570

Interest income

 
(1
)
 

 

 

 
(1
)
(Income) loss in subsidiary
(26,622
)
 
(55
)
 

 
(26,650
)
 
53,327

 

Other income, net

 
(62
)
 

 

 

 
(62
)
Income (loss) before income taxes
26,300

 
45,030

 
55

 
26,650

 
(53,327
)
 
44,708

Income tax expense (benefit)
(1
)
 
18,380

 

 
28

 

 
18,407

Net income (loss)
$
26,301

 
$
26,650

 
$
55

 
$
26,622

 
$
(53,327
)
 
$
26,301

 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation

 

 

 

 

 

Comprehensive income
$
26,301

 
$
26,650

 
$
55

 
$
26,622

 
$
(53,327
)
 
$
26,301


22

Table of Contents

13. Guarantor Subsidiaries (continued)

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

 
Thirty-Nine Weeks Ended October 29, 2011
 
Express, Inc.
 
Subsidiary
Issuers
 
Guarantor
Subsidiaries
 
Other
Subsidiaries
 
Eliminations
 
Consolidated
Total
Net sales
$

 
$
1,399,255

 
$

 
$
947

 
$

 
$
1,400,202

Cost of goods sold, buying, and occupancy costs

 
894,348

 

 
1,740

 

 
896,088

Gross profit

 
504,907

 

 
(793
)
 

 
504,114

Selling, general, and administrative expenses
1,207

 
339,723

 
(166
)
 
1,472

 

 
342,236

Other operating expense (income), net

 
(166
)
 

 

 

 
(166
)
Operating income (loss)
(1,207
)
 
165,350

 
166

 
(2,265
)
 

 
162,044

Interest expense

 
27,843

 

 

 

 
27,843

Interest income

 
(7
)
 

 

 

 
(7
)
(Income) loss in subsidiary
(81,515
)
 
1,951

 

 
(81,515
)
 
161,079

 

Other income, net

 

 

 
(148
)
 

 
(148
)
Income (loss) before income taxes
80,308

 
135,563

 
166

 
79,398

 
(161,079
)
 
134,356

Income tax expense (benefit)
5

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