EXPRESS, INC. - FORM S-1/A - May 12, 2010

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As filed with the Securities and Exchange Commission on May 12, 2010

No. 333-164906

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

AMENDMENT NO. 7

TO

FORM S-1

REGISTRATION STATEMENT UNDER

THE SECURITIES ACT OF 1933

 

 

Express Parent LLC*

(Exact name of registrant as specified in its charter)

 

 

 

Delaware		5600		26-2828128
(State or other jurisdiction of incorporation or organization)		(Primary Standard Industrial Classification Code Number)		(I.R.S. Employer Identification No.)

One Limited Parkway

Columbus, Ohio 43230

(614) 415-4000

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

Matthew C. Moellering

Executive Vice President, Chief Administrative Officer, Chief Financial Officer, Treasurer and Secretary

Express Parent LLC

One Limited Parkway

Columbus, Ohio 43230

(614) 415-4000

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies of all communications, including communications sent to agent for service, should be sent to:

 

Robert M. Hayward, P.C. William R. Burke Kirkland & Ellis LLP 300 North LaSalle Chicago, Illinois 60654 (312) 862-2000		Marc D. Jaffe Latham & Watkins LLP 885 Third Avenue Suite 1000 New York, NY 10022 (212) 906-1200

 

 

Approximate date of commencement of proposed sale to the public:    As soon as practicable after this Registration Statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box:  ¨    

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨    

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.   ¨    

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.   ¨    

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  ¨		Accelerated filer  ¨		Non-accelerated filer  x		Smaller reporting company  ¨
				(Do not check if a smaller reporting company)

CALCULATION OF REGISTRATION FEE

 

 

 

Title of Each Class of Securities to be Registered		Proposed Maximum Aggregate Offering Price(1)(2)			Amount of Registration Fee(2)(3)
Common Stock, $0.01 par value per share		$	350,000,000		$	24,955

 

 

 

(1)

Includes shares of common stock that the underwriters may purchase (including pursuant to the option to purchase additional shares) from us and the selling stockholders.

(2)

Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended.

(3)

Previously paid.

*

The registrant’s board of managers has approved the conversion of the registrant into a corporation to be named Express, Inc. The conversion will become effective following the effectiveness of the registration statement.

The registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 

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The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

Subject to Completion.

Preliminary Prospectus dated May 12, 2010.

PROSPECTUS

16,000,000 Shares

Express, Inc.

Common Stock

 

 

This is an initial public offering of shares of common stock of Express, Inc.

Express is offering 10,500,000 of the shares to be sold in the offering. The selling stockholders identified in this prospectus are offering an additional 5,500,000 shares. Express will not receive any of the proceeds from the sale of the shares being sold by the selling stockholders.

Prior to this offering, there has been no public market for the common stock. It is currently estimated that the initial public offering price per share will be between $18.00 and $20.00. Express has applied to list the common stock on the New York Stock Exchange under the symbol “EXPR.”

Investing in the common stock involves risks that are described in the “Risk Factors” section beginning on page 13 of this prospectus.

 

 

 

		Per Share		Total
Public offering price		$		$
Underwriting discount		$		$
Proceeds, before expenses, to Express, Inc.		$		$
Proceeds, before expenses, to the selling stockholders		$		$

To the extent that the underwriters sell more than 16,000,000 shares of common stock, the underwriters have the option to purchase up to an additional 2,400,000 shares from the selling stockholders at the initial public offering price less the underwriting discount. Express will not receive any of the proceeds from the sale of the shares being sold by the selling stockholders.

Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

The shares will be ready for delivery on or about                     , 2010.

 

 

 

BofA Merrill Lynch		Goldman, Sachs & Co.

		Morgan Stanley
Barclays Capital		Piper Jaffray		UBS Investment Bank		Stephens Inc.

 

 

The date of this prospectus is                     , 2010.

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		Page
Basis of Presentation		ii
Market and Industry Data		iii
Trademarks and Tradenames		iii
Prospectus Summary		1
Risk Factors		13
Forward-Looking Statements		30
Use of Proceeds		32
Dividend Policy		33
Capitalization		34
Dilution		36
Unaudited Pro Forma Condensed Consolidated Financial Data		38
Selected Historical Consolidated Financial and Operating Data		44
Management’s Discussion and Analysis of Financial Condition and Results of Operations		46
Business		74
Management		86
Executive Compensation		93
Security Ownership of Certain Beneficial Owners		115
Certain Relationships and Related Party Transactions		117
Description of Certain Indebtedness		128
Description of Capital Stock		135
Shares Eligible for Future Sale		139
Material U.S. Federal Income Tax Considerations to Non-U.S. Holders		141
Underwriting		144
Legal Matters		150
Experts		151
Change in Accountants		151
Where You Can Find More Information		152
Index To Consolidated Financial Statements		F-1

 

 

No dealer, salesperson or other person is authorized to give any information or to represent anything not contained in this prospectus. You must not rely on any unauthorized information or representations. This prospectus is an offer to sell only the shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date.

 

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BASIS OF PRESENTATION

We use a 52-53 week fiscal year ending on the Saturday closest to January 31. Fiscal years are identified in this prospectus according to the calendar year prior to the calendar year in which they end. For example, references to “2009,” “fiscal 2009,” “fiscal year 2009” or similar references refer to the fiscal year ended January 30, 2010.

On July 6, 2007, investment funds managed by Golden Gate Private Equity, Inc. (“Golden Gate”) acquired 75% of the equity interests in our business from Limited Brands, Inc. (“Limited Brands”). As a result of the acquisition (the “Golden Gate Acquisition”), a new basis of accounting was created beginning July 7, 2007. The periods prior to the Golden Gate Acquisition are referred to as the “Predecessor” periods and the periods after the Golden Gate Acquisition are referred to as the “Successor” periods in this prospectus. The Predecessor periods presented in this prospectus include the period from February 4, 2007 through July 6, 2007, reflecting 22 weeks of operations, and the Successor periods presented in this prospectus include the period from July 7, 2007 through February 2, 2008, reflecting 30 weeks of operations. Due to the Golden Gate Acquisition, the financial statements for the Successor periods are not comparable to those of the Predecessor periods presented in this prospectus. Prior to the Golden Gate Acquisition, our consolidated financial statements were prepared on a carve-out basis from Limited Brands. The carve-out consolidated financial statements include allocations of certain costs of Limited Brands. In the Successor periods we no longer incur these allocated costs, but do incur certain expenses as a standalone company for similar functions, including for certain support services provided by Limited Brands under the Limited Brands Transition Services Agreements, which are discussed further in the section entitled “Certain Relationships and Related Party Transactions.” These allocated costs were based upon various assumptions and estimates and actual results may differ from these allocated costs, assumptions and estimates. Accordingly, the carve-out consolidated financial statements may not be a comparable presentation of our financial position or results of operations as if we had operated as a standalone entity during the Predecessor periods. See “Risk Factors—We have a limited operating history as a standalone company, which may make it difficult to compare our current operating results to prior periods.”

In the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” we have presented pro forma consolidated financial data for the fiscal year ended February 2, 2008, which gives effect to the Golden Gate Acquisition as if such transaction had occurred on February 4, 2007, in addition to the Predecessor and Successor periods. We believe that presenting the discussion and analysis of the results of operations in this manner promotes the overall usefulness of the comparison given the complexities involved with comparing two significantly different periods.

We are currently a Delaware limited liability company. Immediately after our registration statement for this offering is declared effective, and prior to the sale of any of our shares of our common stock, we will convert into a Delaware corporation and change our name from Express Parent LLC to Express, Inc. See “Certain Relationships and Related Party Transactions—Reorganization as a Corporation.” Prior to our registration statement being declared effective, (i) Express Investment Corp. (“EIC”), the holding company that holds 67.3% of the equity interests in us on behalf of certain investment funds managed by Golden Gate and (ii) the holding companies that directly or indirectly hold 6.1% of the equity interests in us on behalf of certain members of management (the “Management Holding Companies”) will be merged with and into us. EIC does not have any independent operations or any significant assets or liabilities and does not comprise a business. Accordingly, this legal merger represents in substance a reorganization and transfer of EIC’s income tax payables or receivables between entities under common control. Accordingly, for financial reporting purposes, the transaction will be reflected as a contribution of certain of EIC’s income tax payables or receivables to us, in exchange for a net receivable or payable of equal amount with an affiliate of Golden Gate. See “Unaudited Pro Forma Condensed Consolidated Financial Data.”

 

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MARKET AND INDUSTRY DATA

We obtained the industry, market and competitive position data throughout this prospectus from our own internal estimates and research as well as from industry and general publications and research, surveys and studies conducted by third parties. Industry publications, studies and surveys generally state that they have been obtained from sources believed to be reliable, although they do not guarantee the accuracy or completeness of such information. While we believe that each of these studies and publications is reliable, we have not independently verified market and industry data from third-party sources. While we believe our internal company research is reliable and the definitions of our market and industry are appropriate, neither such research nor these definitions have been verified by any independent source. Certain industry, market and competitive position data presented in this prospectus was obtained from a survey conducted by e-Rewards, Inc. in April 2007 that was commissioned by Golden Gate prior to the Golden Gate Acquisition in connection with their evaluation of our business. We refer to this survey throughout this prospectus as the “2007 Market Survey.”

TRADEMARKS AND TRADE NAMES

This prospectus includes our trademarks such as “Express,” which are protected under applicable intellectual property laws and are the property of Express Parent LLC or its subsidiaries. This prospectus also contains trademarks, service marks, trade names and copyrights, of other companies, which are the property of their respective owners. Solely for convenience, trademarks and trade names referred to in this prospectus may appear without the ^® or ^TM symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the right of the applicable licensor to these trademarks and trade names.

 

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RISK FACTORS

This offering and an investment in our common stock involve a high degree of risk. You should carefully consider the risks described below, together with the financial and other information contained in this prospectus, before you decide to purchase shares of our common stock. If any of the following risks actually occurs, our business, financial condition, results of operations, cash flow and prospects could be materially and adversely affected. As a result, the trading price of our common stock could decline and you could lose all or part of your investment in our common stock.

Risks Related to Our Business

Our business is sensitive to consumer spending and general economic conditions, and a continued or further economic slowdown could adversely affect our financial performance.

Consumer purchases of discretionary retail items, including our products, generally decline during recessionary periods and other periods where disposable income is adversely affected. Our performance is subject to factors that affect domestic and worldwide economic conditions, including employment, consumer debt, reductions in net worth based on recent severe market declines, residential real estate and mortgage markets, taxation, fuel and energy prices, interest rates, consumer confidence, value of the United States dollar versus foreign currencies and other macroeconomic factors. For example, our net sales declined by 1% in fiscal 2009 compared to fiscal 2008, primarily due to the global economic recession. Further deterioration in economic conditions or increasing unemployment levels, may continue to reduce the level of consumer spending and inhibit consumers’ use of credit, which may continue to adversely affect our revenues and profits. In recessionary periods, we may have to increase the number of promotional sales or otherwise dispose of inventory for which we have previously paid to manufacture, which could further adversely affect our profitability. Our financial performance is particularly susceptible to economic and other conditions in regions or states where we have a significant number of stores. Current economic conditions and further slowdown in the economy could further adversely affect shopping center traffic and new shopping center development and could materially adversely affect us.

In addition, the current economic environment and future recessionary periods may exacerbate some of the risks noted below, including consumer demand, strain on available resources, store growth, interruption of the flow of merchandise from key vendors and foreign exchange rate fluctuations. The risks could be exacerbated individually or collectively.

Our business is highly dependent upon our ability to identify and respond to new and changing fashion trends, customer preferences and other related factors, and our inability to identify and respond to these new trends may lead to inventory markdowns and writeoffs, which could adversely affect us and our brand image.

Our focus on fashion conscious young women and men means that we have a target market of customers whose preferences cannot be predicted with certainty and are subject to change. Our success depends in large part upon our ability to effectively identify and respond to changing fashion trends and consumer demands, and to translate market trends into appropriate, saleable product offerings. Our failure to identify and react appropriately to new and changing fashion trends or tastes or to accurately forecast demand for certain product offerings could lead to, among other things, excess inventories, markdowns and write-offs, which could materially adversely affect our business and our brand image. Because our success depends significantly on our brand image, damage to our brand image as a result of our failure to respond to changing fashion trends could have a negative impact on us.

We often enter into agreements for the manufacture and purchase of merchandise well ahead of the season in which that merchandise will be sold. Therefore we are vulnerable to changes in consumer preference and demand between the time we design and order our merchandise and the season in which this merchandise will

 

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be sold. There can be no assurance that our new product offerings will have the same level of acceptance as our product offerings in the past or that we will be able to adequately and timely respond to the preferences of our customers. The failure of any new product offerings to appeal to our customers could have a material adverse effect on our business, results of operations and financial condition.

Our sales and profitability fluctuate on a seasonal basis and are affected by a variety of other factors.

Our sales and results of operations are affected by a variety of factors, including fashion trends, changes in our merchandise mix, the effectiveness of our inventory management, actions of competitors or mall anchor tenants, holiday or seasonal periods, changes in general economic conditions and consumer spending patterns, the timing of promotional events and weather conditions. As a result, our results of operations fluctuate on a quarterly basis and relative to corresponding periods in prior years, and any of these factors could adversely affect our business and could cause our results of operations to decline. For example, our third and fourth quarter net sales are impacted by early Fall shopping trends and the holiday season. Likewise, we typically experience lower net sales in the first fiscal quarter relative to other quarters. Any significant decrease in net sales during the early Fall selling period or the holiday season would have a material adverse effect on us. In addition, in order to prepare for these seasons, we must order and keep in stock significantly more merchandise than we carry during other parts of the year. This inventory build-up may require us to expend cash faster than we generate by our operations during this period. Any unanticipated decrease in demand for our products during these peak shopping seasons could require us to sell excess inventory at a substantial markdown, which could have a material adverse effect on our business, profitability, ability to repay any indebtedness and our brand image with customers.

We could face increased competition from other retailers that could adversely affect our ability to generate higher net sales and our ability to obtain favorable store locations.

We face substantial competition in the specialty retail apparel industry. We compete on the basis of a combination of factors, including among others, price, breadth, quality and style of merchandise offered, in-store experience, level of customer service, ability to identify and offer new and emerging fashion trends and brand image. We compete with a wide variety of large and small retailers for customers, vendors, suitable store locations and personnel. We face competition from major specialty retailers that offer their own private label assortment, department stores, regional retail chains, web-based retail stores and other direct retailers that engage in the retail sale of apparel accessories, footwear and similar merchandise to fashion-conscious young women and men.

Some of our competitors have greater financial, marketing and other resources available. In many cases, our competitors sell their products in stores that are located in the same shopping malls or lifestyle centers as our stores. In addition to competing for sales, we compete for favorable site locations and lease terms in shopping malls and lifestyle centers and our competitors may be able to secure more favorable locations than us as a result of their relationships with, or appeal to, landlords. Our competitors may also sell substantially similar products at reduced prices through the Internet or through outlet centers or discount stores, increasing the competitive pricing pressure for those products. We cannot assure you that we will continue to be able to compete successfully against existing or future competitors. Our expansion into markets served by our competitors and entry of new competitors or expansion of existing competitors into our markets could have a material adverse effect on us.

Our ability to attract customers to our stores that are located in malls or other shopping centers depends heavily on the success of these malls and shopping centers, and any decrease in customer traffic in these malls or shopping centers could cause our net sales to be less than expected.

A significant number of our stores are located in malls and other shopping centers. Sales at these stores are dependent, to a significant degree, upon the volume of traffic in those shopping centers and the surrounding area. Our stores benefit from the ability of a shopping center’s other tenants, particularly anchor stores, such as department stores, to generate consumer traffic in the vicinity of our stores and the continuing popularity of the

 

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shopping center as a shopping destination. Our sales volume and traffic generally may be adversely affected by, among other things, a decrease in popularity of malls or other shopping centers in which our stores are located, the closing of anchor stores important to our business, a decline in popularity of other stores in the malls or other shopping centers in which our stores are located or a deterioration in the financial condition of shopping center operators or developers which could, for example, limit their ability to finance tenant improvements for us and other retailers. A reduction in consumer traffic as a result of these or any other factors, or our inability to obtain or maintain favorable store locations within malls or other shopping centers could have a material adverse effect on us. Although we do not have specific information with respect to the malls and other shopping centers in which we locate or plan to locate our stores, we believe mall and other shopping center vacancy rates have been rising and mall and other shopping center traffic has been decreasing nationally, as a result of the current economic downturn which could reduce traffic to our stores.

We do not own or operate any manufacturing facilities and therefore depend upon independent third parties for the manufacture of all of our merchandise, and any inability of a manufacturer to ship goods to our specifications or to operate in compliance with applicable laws could negatively impact our business.

We do not own or operate any manufacturing facilities. As a result, we are dependent upon our timely receipt of quality merchandise from third-party manufacturers. A manufacturer’s inability to ship orders to us in a timely manner or meet our quality standards could cause delays in responding to consumer demands and negatively affect consumer confidence in the quality and value of our brand or negatively impact our competitive position, all of which could have a material adverse effect on our financial condition or results of operations. Furthermore, we are susceptible to increases in sourcing costs, which we may not be able to pass on to customers, and changes in payment terms from manufacturers, which could adversely affect our financial condition or results of operations.

Failure by our manufacturers to comply with our guidelines also exposes us to various risks, including with respect to use of acceptable labor practices and compliance with applicable laws. We do not independently investigate whether our vendors and manufacturers use acceptable labor practices and comply with applicable laws, such as child labor and other labor laws, and instead rely on audits performed by several unrelated third party auditors. Our business may be negatively impacted should any of our manufacturers experience an interruption in operations, including due to labor disputes and failure to comply with laws, and our business may suffer from negative publicity for using manufacturers that do not engage in acceptable labor practices and comply with applicable law. Any of these results could harm our brand image and have a material adverse effect on our business and growth.

The interruption of the flow of merchandise from international manufacturers could disrupt our supply chain.

We purchase the majority of our merchandise outside of the United States through arrangements with approximately 90 vendors, utilizing approximately 350 foreign manufacturing facilities located throughout the world, primarily in Asia and Central and South America. Political, social or economic instability in Asia, Central or South America, or in other regions in which our manufacturers are located, could cause disruptions in trade, including exports to the United States. Other events that could also cause disruptions to exports to the United States include:

 

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the imposition of additional trade law provisions or regulations;

 

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quotas imposed by bilateral textile agreements;

 

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the financial instability or bankruptcy of manufacturers; and

 

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We cannot predict whether the countries in which our merchandise is manufactured, or may be manufactured in the future, will be subject to new or additional trade restrictions imposed by the United States or other foreign governments, including the likelihood, type or effect of any such restrictions. Trade restrictions, including new or increased tariffs or quotas, embargos, safeguards and customs restrictions against apparel items, as well as United States or foreign labor strikes and work stoppages or boycotts, could increase the cost or reduce the supply of apparel available to us and adversely affect our business, financial condition or results of operations.

If we encounter difficulties associated with our distribution facilities or if they were to shut down for any reason, we could face shortages of inventory, delayed shipments to our online customers and harm to our reputation. Any of these issues could have a material adverse effect on our business operations.

Our distribution facilities are operated by third parties. Our Columbus, Ohio facility operates as our central distribution facility and supports our entire business, as all of our merchandise is shipped to the central distribution facility from our vendors, and is then packaged and shipped to our stores or our e-commerce distribution facility for further distribution to our online customers. The success of our stores and the satisfaction of our online customers depend on their timely receipt of merchandise. The efficient flow of our merchandise requires that the third parties who operate our facilities have adequate capacity in both of our distribution facilities to support our current level of operations, and any anticipated increased levels that may follow from the growth of our business. If we encounter difficulties associated with our distribution facilities or in our relationships with the third parties who operate our facilities or if either facility were to shut down for any reason, including as a result of fire or other natural disaster, we could face shortages of inventory, resulting in “out of stock” conditions in our stores, incur significantly higher costs and longer lead times associated with distributing our products to both our stores and online customers and experience dissatisfaction from our customers. We expect that in the Fall of 2010, our e-commerce distribution facility will be moved from Warren, Pennsylvania to a facility located in Groveport, Ohio, and we may encounter difficulties and unanticipated costs in transitioning our e-commerce fulfillment operations to this facility. Any of these issues could have a material adverse effect on our business and harm our reputation.

We rely upon independent third-party transportation providers for substantially all of our product shipments and are subject to increased shipping costs as well as the potential inability of our third-party transportation providers to deliver on a timely basis.

We currently rely upon independent third-party transportation providers for substantially all of our product shipments, including shipments to and from all of our stores. Our utilization of these delivery services for shipments is subject to risks, including increases in fuel prices, which would increase our shipping costs, and employee strikes and inclement weather which may impact a shipping company’s ability to provide delivery services that adequately meet our shipping needs. If we change the shipping companies we use, we could face logistical difficulties that could adversely affect deliveries and we would incur costs and expend resources in connection with such change. Moreover, we may not be able to obtain terms as favorable as those received from independent third-party transportation providers which in turn would increase our costs.

Our growth strategy, including our international expansion plan, is dependent on a number of factors, any of which could strain our resources or delay or prevent the successful penetration into new markets.

Our growth strategy is partially dependent on opening new stores across North America, remodeling existing stores in a timely manner and operating them profitably. Additional factors required for the successful implementation of our growth strategy include, but are not limited to, obtaining desirable store locations, negotiating acceptable leases, completing projects on budget, supplying proper levels of merchandise and successfully hiring and training store managers and sales associates. In order to optimize profitability for new stores, we must secure desirable retail lease space when opening stores in new and existing markets. We must choose store sites, execute favorable real estate transactions on terms that are acceptable to us, hire competent personnel and effectively open and operate these new stores. We historically have received landlord allowances for store build outs, which offset certain capital expenditures we must make to open a new store. If landlord allowances cease to be

 

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available to us in the future or are decreased, opening new stores would require more capital outlay, which could adversely affect our ability to continue opening new stores.

To the extent we open new stores in markets where we have existing stores, our existing stores in those markets may experience reduced net sales. Our planned growth will also require additional infrastructure for the development, maintenance and monitoring of those stores. In addition, if our current management systems and information systems are insufficient to support this expansion, our ability to open new stores and to manage our existing stores would be adversely affected. If we fail to continue to improve our infrastructure, we may be unable to implement our growth strategy or maintain current levels of operating performance in our existing stores.

Additionally, we plan to expand outside of North America through development agreements with third parties and these plans could be negatively impacted by a variety of factors. We may be unable to find acceptable partners with whom we can enter into joint development agreements, negotiate acceptable terms for franchise and development agreements and gain acceptance from consumers outside of North America. Our planned usage of development agreements outside of North America also creates the inherent risk if such third parties are able to both effectively operate the businesses and appropriately project our brand image in their respective markets. Ineffective or inappropriate operation of our partners’ businesses or projection of our brand image could create difficulties in the execution of our international expansion plans.

Our domestic growth plans and our international expansion plan will place increased demands on our financial, operational, managerial and administrative resources. These increased demands may cause us to operate our business less efficiently, which in turn could cause deterioration in the performance of our existing stores. Furthermore, relating to our international expansion, our ability to conduct business in international markets may be affected by legal, regulatory, political and economic risks, including our unfamiliarity with local business and legal environments in other areas of the world. Our international expansion strategy and success could also be adversely impacted by the global economy, as well as by fluctuations in the value of the dollar against foreign currencies.

Our business depends in part on a strong brand image, and if we are not able to maintain and enhance our brand, particularly in new markets where we have limited brand recognition, we may be unable to attract sufficient numbers of customers to our stores or sell sufficient quantities of our products.

Our ability to maintain our reputation is critical to our brand image. Our reputation could be jeopardized if we fail to maintain high standards for merchandise quality and integrity. Any negative publicity about these types of concerns may reduce demand for our merchandise. Failure to maintain high ethical, social and environmental standards for all of our operations and activities or adverse publicity regarding our responses to these concerns could also jeopardize our reputation. Failure to comply with local laws and regulations, to maintain an effective system of internal controls or to provide accurate and timely financial statement information could also hurt our reputation. Damage to our reputation or loss of consumer confidence for any of these reasons could have a material adverse effect on our business, financial condition and results of operations, as well as require additional resources to rebuild our reputation.

We are subject to risks associated with leasing substantial amounts of space, including future increases in occupancy costs.

We lease all of our store locations, our corporate headquarters and our central distribution facility. We typically occupy our stores under operating leases with terms of ten years, with options to renew for additional multi-year periods thereafter. In the future, we may not be able to negotiate favorable lease terms. Our inability to do so may cause our occupancy costs to be higher in future years or may force us to close stores in desirable locations.

Some of our leases have early cancellation clauses, which permit the lease to be terminated by us or the landlord if certain sales levels are not met in specific periods or if the center does not meet specified occupancy

 

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standards. In addition to future minimum lease payments, some of our store leases provide for additional rental payments based on a percentage of net sales, or “percentage rent,” if sales at the respective stores exceed specified levels, as well as the payment of common area maintenance charges, real property insurance and real estate taxes. Many of our lease agreements have defined escalating rent provisions over the initial term and any extensions. As we expand our store base, our lease expense and our cash outlays for rent under the lease terms will increase.

We depend on cash flow from operations to pay our lease expenses. If our business does not generate sufficient cash flow from operating activities to fund these expenses, we may not be able to service our lease expenses, which could materially harm our business.

If an existing or future store is not profitable, and we decide to close it, we may nonetheless be committed to perform our obligations under the applicable lease including, among other things, paying the base rent for the balance of the lease term. Moreover, even if a lease has an early cancellation clause, we may not satisfy the contractual requirements for early cancellation under that lease. Our inability to enter into new leases or renew existing leases on terms acceptable to us or be released from our obligations under leases for stores that we close could materially adversely affect us.

Our failure to find store employees that reflect our brand image and embody our culture could adversely affect our business.

Our success depends in part upon our ability to attract, motivate and retain a sufficient number of store employees, including store managers, who understand and appreciate our corporate culture and customers, and are able to adequately and effectively represent this culture and establish credibility with our customers. The store employee turnover rate in the retail industry is generally high. Excessive store employee turnover will result in higher employee costs associated with finding, hiring and training new store employees. If we are unable to hire and retain store personnel capable of consistently providing a high level of customer service, as demonstrated by their enthusiasm for our culture, understanding of our customers and knowledge of the merchandise we offer, our ability to open new stores may be impaired, the performance of our existing and new stores could be materially adversely affected and our brand image may be negatively impacted. Competition for such qualified individuals could require us to pay higher wages to attract a sufficient number of employees. Additionally, our labor costs are subject to many external factors, including unemployment levels, prevailing wage rates, minimum wage laws, potential collective bargaining arrangements, health insurance costs and other insurance costs and changes in employment and labor legislation or other workplace regulation (including changes in entitlement programs such as health insurance and paid leave programs). Such increase in labor costs may adversely impact our profitability, or if we fail to pay such higher wages we could suffer increased employee turnover.

We are also dependent upon temporary personnel to adequately staff our stores and distribution facilities, with heightened dependence during busy periods such as the holiday season and when multiple new stores are opening. There can be no assurance that we will receive adequate assistance from our temporary personnel, or that there will be sufficient sources of suitable temporary personnel to meet our demand. Any such failure to meet our staffing needs or any material increases in employee turnover rates could have a material adverse effect on our business or results of operations.

We depend on key executive management and may not be able to retain or replace these individuals or recruit additional personnel, which could harm our business.

We depend on the leadership and experience of our key executive management. The loss of the services of any of our executive management members could have a material adverse effect on our business and prospects, as we may not be able to find suitable individuals to replace such personnel on a timely basis or without incurring increased costs, or at all. We believe that our future success will depend greatly on our continued ability to attract

 

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and retain highly skilled and qualified personnel. There is a high level of competition for experienced, successful personnel in the retail industry. Our inability to meet our staffing requirements in the future could impair our growth and harm our business.

We work with Limited Brands to provide us with certain key services for our business. If Limited Brands fails to perform its obligations to us or if we do not find appropriate replacement services, we may be unable to provide these services or implement substitute arrangements on a timely and cost-effective basis on terms favorable to us.

Limited Brands, our former parent and a current equity holder, provides certain services to us under various agreements. Limited Brands has provided us, under the transition services agreement, with support services in various administrative and operational areas. Most of the services provided to us under this agreement have expired, and with respect to those services we have either developed our own capabilities or engaged another third party service provider. The transition services agreement requires us to purchase a minimum percentage of our product through MAST Industries, Inc. (“MAST”), an affiliate of Limited Brands, until July 2010. The only other material services still provided by Limited Brands under the transition services agreement are information technology and customer marketing services. Both of these services expire in July 2010. Under the logistics services agreement with Limited Brands that was entered into on October 5, 2009 and took effect in February 2010, Limited Brands has agreed to provide certain inbound and outbound transportation and delivery services, distribution services, customs and brokerage services and rental of warehouse/distribution space. The logistics services agreement ends on April 30, 2016. The agreement will continue thereafter unless it is terminated by either party on no less than 24 months’ prior notice. Notwithstanding the foregoing, we have the right to terminate the agreement on 24 months’ prior notice, which may be given any time after February 1, 2011. In no event may the termination of the agreement occur between October 1 of any calendar year and the last day of February of the next calendar year. If Limited Brands fails to perform its obligations under either the transition services agreement, logistics services agreement or other agreements we may be unable to obtain substitute arrangements in a timely and cost-effective manner. In addition, we may be unable to obtain replacement services as these agreements expire, or may be required to incur additional costs and may experience delays or business interruptions as a result of our transition to other service providers, which could have a material adverse effect on our business. See “Certain Relationships and Related Party Transactions.”

We rely significantly on information systems and any failure, inadequacy, interruption or security failure of those systems could harm our ability to effectively operate our business.

Our ability to effectively manage and maintain our inventory, and to ship products to our stores and our customers on a timely basis, depends significantly on our information systems. To manage the growth of our operations, personnel and real estate portfolio, we will need to continue to improve and expand our operational and financial systems, real estate management systems, transaction processing, internal controls and business processes; in doing so, we could encounter implementation issues and incur substantial additional expenses. The failure of our information systems to operate effectively, problems with transitioning to upgraded or replacement systems or expanding them into new stores, or a breach in security of these systems could adversely impact the promptness and accuracy of our merchandise distribution, transaction processing, financial accounting and reporting, the efficiency of our operations and our ability to properly forecast earnings and cash requirements. We could be required to make significant additional expenditures to remediate any such failure, problem or breach. Such events may have a material adverse effect on us.

We sell merchandise over the Internet through our website, express.com. Our Internet operations may be affected by our reliance on third-party hardware and software providers, technology changes, risks related to the failure of computer systems that operate the Internet business, telecommunications failures, electronic break-ins and similar disruptions. Furthermore, our ability to conduct business on the Internet may be affected by liability for on-line content and state and federal privacy laws.

 

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In addition, we may now and in the future implement new systems to increase efficiencies and profitability. To manage growth of our operations and personnel, we will need to continue to improve and expand our operational and financial systems, transaction processing, internal controls and business processes. When implementing or changing existing processes, we may encounter transitional issues and incur substantial additional expenses.

System security risk issues could disrupt our internal operations or information technology services, and any such disruption could harm our net sales, increase our expenses and harm our reputation.

Experienced computer programmers and hackers, or even internal users, may be able to penetrate our network security and misappropriate our confidential information or that of third parties, including our customers, create system disruptions or cause shutdowns. In addition, employee error, malfeasance or other errors in the storage, use or transmission of any such information could result in a disclosure to third parties outside of our network. As a result, we could incur significant expenses addressing problems created by any such inadvertent disclosure or any security breaches of our network. This risk is heightened because we collect and store customer information, including credit card information, and use certain customer information for marketing purposes. Any compromise of customer information could subject us to customer or government litigation and harm our reputation, which could adversely affect our business and growth. Moreover, we could incur significant expenses or disruptions of our operations in connection with system failures or breaches. In addition, sophisticated hardware and operating system software and applications that we procure from third parties may contain defects in design or manufacture, including “bugs” and other problems that could unexpectedly interfere with the operation of the systems. The costs to us to eliminate or alleviate security problems, viruses and bugs, or any problems associated with the outsourced services, could be significant, and the efforts to address these problems could result in interruptions, delays or cessation of service that may impede our sales, distribution or other critical functions.

There are claims made against us from time to time that can result in litigation or regulatory proceedings which could distract management from our business activities and result in significant liability.

We face the risk of litigation and other claims against us. Litigation and other claims may arise in the ordinary course of our business and include commercial disputes, intellectual property issues, product-oriented allegations and slip and fall claims. In addition, we could face a wide variety of employee claims against us, including general discrimination, privacy, labor and employment, ERISA and disability claims. For example, Express, LLC is named as a defendant in a purported class action lawsuit alleging various California state labor law violations. See “Business—Legal Proceedings.” Any claims could result in litigation against us and could also result in regulatory proceedings being brought against us by various federal and state agencies that regulate our business, including the United States Equal Employment Opportunity Commission. Often these cases raise complex factual and legal issues, which are subject to risks and uncertainties and which could require significant management time. Litigation and other claims and regulatory proceedings against us could result in unexpected expenses and liability, and could also materially adversely affect our operations and our reputation.

In addition, we may be subject to liability if we infringe the trademarks or other intellectual property rights of third parties. If we were to be found liable for any such infringement, we could be required to pay substantial damages and could be subject to injunctions preventing further infringement. Such infringement claims could subject us to boycotts by our customers and harm to our brand image. In addition, any payments we are required to make and any injunctions we are required to comply with as a result of such infringement actions could adversely affect our financial results.

Changes in laws, including employment laws and laws related to our merchandise, could make conducting our business more expensive or otherwise change the way we do business.

We are subject to numerous regulations, including labor and employment, customs, truth-in-advertising, consumer protection and zoning and occupancy laws and ordinances that regulate retailers generally and/or

 

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govern the importation, promotion and sale of merchandise and the operation of stores and warehouse facilities. If these regulations were to change or were violated by our management, employees, vendors, buying agents or trading companies, the costs of certain goods could increase, or we could experience delays in shipments of our goods, be subject to fines or penalties, or suffer reputational harm, which could reduce demand for our merchandise and hurt our business and results of operations.

In addition to increased regulatory compliance requirements, changes in laws could make ordinary conduct of our business more expensive or require us to change the way we do business. For example, changes in federal and state minimum wage laws could raise the wage requirements for certain of our employees, which would likely cause us to reexamine our entire wage structure for stores. Other laws related to employee benefits and treatment of employees, including laws related to limitations on employee hours, supervisory status, leaves of absence, mandated health benefits or overtime pay, could also negatively impact us, such as by increasing compensation and benefits costs for overtime and medical expenses.

Moreover, changes in product safety or other consumer protection laws could lead to increased costs to us for certain merchandise, or additional labor costs associated with readying merchandise for sale. It is often difficult for us to plan and prepare for potential changes to applicable laws and future actions or payments related to such changes could be material to us.

We may be unable to protect our trademarks or other intellectual property rights, which could harm our business.

We rely on certain trademark registrations and common law trademark rights to protect the distinctiveness of our brand. However, there can be no assurance that the actions we have taken to establish and protect our trademarks will be adequate to prevent imitation of our trademarks by others or to prevent others from claiming that sales of our products infringe, dilute or otherwise violate third party trademarks or other proprietary rights in order to block sales of our products.

The laws of certain foreign countries may not protect the use of unregistered trademarks to the same extent as do the laws of the United States. As a result, international protection of our brand image may be limited and our right to use our trademarks outside the United States could be impaired. Other persons or entities may have rights to trademarks that contain portions of our marks or may have registered similar or competing marks for apparel and/or accessories in foreign countries in which our vendors source our merchandise. There may also be other prior registrations of trademarks identical or similar to our trademarks in other foreign countries of which we are not aware. Accordingly, it may be possible for others to prevent the manufacture of our branded goods in certain foreign countries or the sale or exportation of our branded goods from certain foreign countries to the United States. If we were unable to reach a licensing arrangement with these parties, our vendors may be unable to manufacture our products in those countries. Our inability to register our trademarks or purchase or license the right to use the relevant trademarks or logos in these jurisdictions could limit our ability to obtain supplies from less costly markets or penetrate new markets in jurisdictions outside the United States.

Litigation may be necessary to protect our trademarks and other intellectual property rights, to enforce these rights or to defend against claims by third parties alleging that we infringe, dilute or violate third party trademark or other intellectual property rights. Any litigation or claims brought by or against us, whether with or without merit, or whether successful or not, could result in substantial costs and diversion of our resources, which could have a material adverse effect on our business, financial condition, results of operations or cash flows. Any intellectual property litigation or claims against us could result in the loss or compromise of our intellectual property rights, could subject us to significant liabilities, require us to seek licenses on unfavorable terms, if available at all, prevent us from manufacturing or selling certain products and/or require us to redesign or relabel our products or rename our brand, any of which could have a material adverse effect on our business, financial condition, results of operations or cash flows.

 

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We have a limited operating history as a standalone company, which may make it difficult to compare our current operating results to prior periods.

On July 6, 2007, investment funds managed by Golden Gate acquired 75% of the equity interest in our business from Limited Brands. As a result of the Golden Gate Acquisition, a new basis of accounting was created beginning July 7, 2007 for the Successor periods ending after such date. Prior to the Golden Gate Acquisition, our consolidated financial statements were prepared on a carve-out basis from Limited Brands. The carve-out consolidated financial statements include allocations of certain costs of Limited Brands. In the Successor periods we no longer incur these allocated costs, but do incur certain expenses as a standalone company for similar functions, including for certain support services provided by Limited Brands under the Limited Brands transition services agreement, which are discussed further in the section entitled “Certain Relationships and Related Party Transactions.” These allocated costs were based upon various assumptions and estimates and actual results may differ from these allocated costs, assumptions and estimates. Accordingly, the carve-out consolidated financial statements may not provide a comparable presentation of our financial position or results of operations as if we had operated as a standalone entity during the Predecessor periods.

Our substantial indebtedness and lease obligations could adversely affect our financial flexibility and our competitive position.

We have, and we will continue to have, a significant amount of indebtedness. As of April 3, 2010, we had $515.9 million of outstanding indebtedness (net of unamortized original issue discounts of $6.0 million). As of April 3, 2010, we had no borrowings outstanding and $139.6 million available under our revolving credit facility. On a pro forma as adjusted basis giving effect to the use of proceeds from this offering, we had $368.4 million of outstanding indebtedness (net of unamortized original issue discounts of $3.5 million) as of April 3, 2010. Our substantial level of indebtedness increases the risk that we may be unable to generate cash sufficient to pay amounts due in respect of our indebtedness. We also have, and will continue to have, significant lease obligations. As of April 3, 2010, our minimum annual rental obligations under long-term operating leases for fiscal 2010 and 2011 are $159.4 million and $133.9 million, respectively. Our substantial indebtedness and lease obligations could have other important consequences to you and significant effects on our business. For example, it could:

 

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increase our vulnerability to adverse changes in general economic, industry and competitive conditions;

 

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require us to dedicate a substantial portion of our cash flow from operations to make payments on our indebtedness and leases, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other general corporate purposes;

 

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limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;

 

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restrict us from exploiting business opportunities;

 

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make it more difficult to satisfy our financial obligations, including payments on our indebtedness;

 

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place us at a disadvantage compared to our competitors that have less debt and lease obligations; and

 

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limit our ability to borrow additional funds for working capital, capital expenditures, acquisitions, debt service requirements, execution of our business strategy or other general corporate purposes.

In addition, the agreements governing our existing credit agreements and the indenture governing the Senior Notes contain, and the agreements evidencing or governing other future indebtedness may contain, restrictive covenants that will limit our ability to engage in activities that may be in our long-term best interests. Our failure to comply with those covenants could result in an event of default which, if not cured or waived, could result in the acceleration of all of our indebtedness.

 

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Our indebtedness may restrict our current and future operations, which could adversely affect our ability to respond to changes in our business and to manage our operations.

Our existing credit agreements and the indenture governing the Senior Notes contain financial restrictions on us and our restricted subsidiaries, including restrictions on our or our restricted subsidiaries’ ability to, among other things:

 

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place liens on our or our restricted subsidiaries’ assets;

 

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make investments other than permitted investments;

 

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incur additional indebtedness;

 

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prepay or redeem certain indebtedness;

 

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merge, consolidate or dissolve;

 

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sell assets;

 

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engage in transactions with affiliates;

 

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change the nature of our business;

 

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change our or our subsidiaries’ fiscal year or organizational documents; and

 

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make restricted payments (including certain equity issuances).

In addition, we are required to maintain compliance with various financial ratios in the agreement governing our Opco credit facilities, including:

 

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pursuant to our Opco revolving credit facility, a fixed charge coverage ratio of 1.00 to 1.00, if excess availability plus eligible cash collateral is less than $30.0 million; and

 

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pursuant to our Opco term loan facility, a leverage ratio of not more than 2.25 to 1.00 at the end of the fourth quarter of 2009, 2.00 to 1.00 at the end of the first and second quarters of 2010 and 1.75 to 1.00 thereafter.

A failure by us or our subsidiaries to comply with the covenants or to maintain the required financial ratios contained in the agreements governing our indebtedness could result in an event of default under such indebtedness, which could adversely affect our ability to respond to changes in our business and manage our operations. Additionally, a default by us under one agreement covering our indebtedness may trigger cross-defaults under other agreements covering our indebtedness. Upon the occurrence of an event of default or cross-default under any of the agreements governing our indebtedness, the lenders could elect to declare all amounts outstanding to be due and payable and exercise other remedies as set forth in the agreements. If any of our indebtedness were to be accelerated, there can be no assurance that our assets would be sufficient to repay this indebtedness in full, which could have a material adverse effect on our ability to continue to operate as a going concern. See “Description of Certain Indebtedness.”

Our results may be adversely affected by fluctuations in energy costs.

Energy costs have fluctuated dramatically in the past. These fluctuations may result in an increase in our transportation costs for distribution, utility costs for our retail stores and costs to purchase product from our manufacturers. A continual rise in energy costs could adversely affect consumer spending and demand for our products and increase our operating costs, both of which could have a material adverse effect on our financial condition and results of operations.

Changes in taxation requirements or the results of tax audits could adversely affect our financial results.

In connection with the Reorganization, we will elect to be treated as a corporation under Subchapter C of Chapter 1 of the Internal Revenue Code effective May 2, 2010 which will subject us to additional taxes and risks, including tax on our income. As a result of the Reorganization, we expect to record a net deferred tax asset of

 

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approximately $35.0 million and a one-time, non-cash tax benefit of approximately $35.0 million. Dividends, if any, distributed to our stockholders will be subject to double taxation after the election. In addition, we may be subject to periodic audits by the Internal Revenue Service and other taxing authorities. These audits may challenge certain of our tax positions, such as the timing and amount of deductions and allocations of taxable income to the various jurisdictions. These additional taxes and the results of any tax audits could adversely affect our financial results.

In addition, we are subject to income tax in numerous jurisdictions, and in the future as a result of our expansion we may be subject to additional jurisdictions, including international and domestic locations. Our products are subject to import and excise duties and/or sales or value-added taxes in many jurisdictions. Fluctuations in tax rates and duties could have a material adverse effect on our financial condition, results of operations or cash flows.

We may recognize impairment on long-lived assets.

Our long-lived assets, primarily stores and intangible assets, are subject to periodic testing for impairment. Store assets are reviewed using factors including, but not limited to, our future operating plans and projected future cash flows. Failure to achieve our future operating plans or generate sufficient levels of cash flow at our stores could result in impairment charges on long-lived assets, which could have a material adverse effect on our financial condition or results of operations.

If we fail to establish and maintain adequate internal controls over financial reporting, we may not be able to report our financial results in a timely and reliable manner, which could harm our business and impact the value of our securities.

We depend on our ability to produce accurate and timely financial statements in order to run our business. If we fail to do so, our business could be negatively affected and our independent registered public accounting firm may be unable to attest to the accuracy of our financial statements and effectiveness of our internal controls.

We restated our 2007 Successor and fiscal 2008 financial statements after certain accounting errors were identified that we determined to be material. Management identified the following material weaknesses in its internal controls: (1) we did not have the appropriate resources and controls to properly account for our deferred taxes and (2) we did not have adequate oversight and controls related to the accounting for complex agreements arising from transactions unrelated to our core business operations, which resulted in accounting errors. A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Internal Control Over Financial Reporting.”

We have remediated the material weakness associated with accounting for deferred taxes as a result of expanding our senior level resources in our tax, accounting and financial reporting groups in fiscal 2008. While we are still in the process of remediating the material weakness associated with accounting for complex agreements arising from transactions unrelated to the our core business operations, we have developed and are implementing a plan to remediate this material weakness by, among other things, establishing an internal committee of accounting, legal and internal audit personnel to review our policies and accounting treatment of all complex agreements and monitor ongoing compliance with such agreements. This committee has already established a charter, selected members, has held meetings, and intends to hold, at a minimum, monthly meetings on an on-going basis. In addition, we have also hired a director of external reporting to expand our financial reporting resources in conjunction with this offering.

If we fail to fully remediate this material weakness or fail to maintain effective internal controls in the future, it could result in a material misstatement of our financial statements that would not be prevented or detected on a timely basis, which could cause investors to lose confidence in our financial information or cause our stock price to decline.

 

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Risks Related to this Offering and Ownership of Our Common Stock

An active public market for our common stock may not develop following this offering, which could limit your ability to sell your shares of our common stock at an attractive price, or at all.

Prior to this offering, there has been no public market for our common stock. We cannot predict the extent to which investor interest in our company will lead to the development of an active trading market in our common stock or how liquid that market might become. An active public market for our common stock may not develop or be sustained after the offering. If an active public market does not develop or is not sustained, it may be difficult for you to sell your shares of common stock at a price that is attractive to you, or at all.

We are a “controlled company,” controlled by Golden Gate and Limited Brands whose interests in our business may be different from yours.

Upon completion of this offering, Golden Gate will own approximately 48.8 million shares, or 55%, of our outstanding common stock, and Limited Brands will own approximately 16.3 million shares, or 18%, of our outstanding common stock. Accordingly, Golden Gate, acting alone or together with Limited Brands, will be able to control virtually all matters requiring stockholder approval, including amendments to our certificate of incorporation and bylaws and approval of significant corporate transactions, including mergers and sales of substantially all of our assets.

Pursuant to a Stockholders Agreement to be entered into by Golden Gate and Limited Brands in connection with this offering, Golden Gate will have the right to nominate (1) three directors to our Board of Directors, so long as Golden Gate holds at least 50% of the number of shares of our common stock held by Golden Gate immediately prior to the completion of this offering, and (2) two directors, so long as Golden Gate holds at least 25% of the number of shares of our common stock held by Golden Gate immediately prior to the completion of this offering. Limited Brands will have the right to nominate (1) two directors to our Board of Directors, so long as Limited Brands holds at least 50% of the number of shares of our common stock held by Limited Brands immediately prior to the completion of this offering, and (2) one director, so long as Limited Brands holds at least 25% of the number of shares of our common stock held by Limited Brands immediately prior to the completion of this offering. The Stockholders Agreement will require Golden Gate and Limited Brands to vote their shares of common stock in favor of those persons nominated pursuant to rights under the Stockholders Agreement. Accordingly, Golden Gate and Limited Brands, acting together, will be able to control the election of a majority of our directors. The directors so elected will have the authority, subject to the terms of our indebtedness and the rules and regulations of the New York Stock Exchange (“NYSE”), to issue additional stock, implement stock repurchase programs, declare dividends and make other decisions, including determining what matters are submitted to a vote of our stockholders.

Because of the equity ownership of Golden Gate and Limited Brands, we will be considered a “controlled company” for purposes of the NYSE listing requirements. As such, we will be exempt from the NYSE corporate governance requirements that our board of directors meet the standard of independence established by those corporate governance requirements and exempt from the requirements that we have separate Compensation and Nominating and Corporate Governance Committees made up entirely of directors who meet such independence standards. The NYSE independence standards are intended to ensure that directors who meet the independence standard are free of any conflicting interest that could influence their actions as directors. It is possible that the interests of Golden Gate and Limited Brands may in some circumstances conflict with our interests and the interests of our other stockholders, including you.

 

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Our stock price may be volatile or may decline regardless of our operating performance, and you may not be able to resell your shares at or above the initial public offering price.

After this offering, the market price for our common stock is likely to be volatile, in part because our shares have not been traded publicly. In addition, the market price of our common stock may fluctuate significantly in response to a number of factors, most of which we cannot control, including:

 

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quarterly variations in our operating results compared to market expectations;

 

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changes in preferences of our customers;

 

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announcements of new products or significant price reductions by us or our competitors;

 

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size of the public float;

 

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stock price performance of our competitors;

 

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fluctuations in stock market prices and volumes;

 

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default on our indebtedness or foreclosure of our properties;

 

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actions by competitors or other shopping center tenants;

 

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changes in senior management or key personnel;

 

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changes in financial estimates by securities analysts;

 

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negative earnings or other announcements by us or other retail apparel companies;

 

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downgrades in our credit ratings or the credit ratings of our competitors;

 

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issuances of capital stock; and

 

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global economic, legal and regulatory factors unrelated to our performance.

Numerous factors affect our business and cause variations in our operating results and affect our net sales and comparable store sales, including consumer preferences, buying trends and overall economic trends; our ability to identify and respond effectively to fashion trends and customer preferences; actions by competitors and other shopping center tenants; changes in our merchandise mix; pricing; the timing of our releases of new merchandise and promotional events; the level of customer service that we provide in our stores; changes in sales mix among sales channels; our ability to source and distribute products effectively; inventory shrinkage; weather conditions, particularly during the holiday season; and the number of stores we open, close and convert in any period.

The initial public offering price of our common stock will be determined by negotiations between us and the underwriters based upon a number of factors and may not be indicative of prices that will prevail following the consummation of this offering. Volatility in the market price of our common stock may prevent investors from being able to sell their common stock at or above the initial public offering price. As a result, you may suffer a loss on your investment.

In addition, stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many retail companies. In the past, stockholders have instituted securities class action litigation following periods of market volatility. If we were involved in securities litigation, we could incur substantial costs and our resources and the attention of management could be diverted from our business.

 

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Future sales of our common stock, or the perception in the public markets that these sales may occur, may depress our stock price.

Sales of substantial amounts of our common stock in the public market after this offering, or the perception that these sales could occur, could adversely affect the price of our common stock and could impair our ability to raise capital through the sale of additional shares. Upon completion of this offering, we will have 88.7 million shares of common stock outstanding. The shares of common stock offered in this offering will be freely tradable without restriction under the Securities Act, except for any shares of our common stock that may be held or acquired by our directors, executive officers and other affiliates, as that term is defined in the Securities Act, which will be restricted securities under the Securities Act. Restricted securities may not be sold in the public market unless the sale is registered under the Securities Act or an exemption from registration is available.

We, each of our officers and directors and the selling stockholders have agreed, subject to certain exceptions, with the underwriters not to dispose of or hedge any of the shares of common stock or securities convertible into or exchangeable for, or that represent the right to receive, shares of common stock during the period from the date of this prospectus continuing through the date 180 days after the date of this prospectus, except with the prior written consent of Merrill Lynch, Pierce, Fenner & Smith Incorporated and Goldman, Sachs & Co. See “Underwriting.”

All of our shares of common stock outstanding as of the date of this prospectus may be sold in the public market by existing stockholders 180 days after the date of this prospectus, subject to applicable limitations imposed under federal securities laws. See “Shares Eligible for Future Sale” for a more detailed description of the restrictions on selling shares of our common stock after this offering.

In the future, we may also issue our securities if we need to raise capital in connection with a capital raise or acquisitions. The amount of shares of our common stock issued in connection with a capital raise or acquisition could constitute a material portion of our then-outstanding shares of our common stock.

Anti-takeover provisions in our charter documents and Delaware law might discourage or delay acquisition attempts for us that you might consider favorable.

Our certificate of incorporation and bylaws will contain provisions that may make the acquisition of our company more difficult without the approval of our board of directors. These provisions:

 

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establish a classified board of directors so that not all members of our board of directors are elected at one time;

 

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authorize the issuance of undesignated preferred stock, the terms of which may be established and the shares of which may be issued without stockholder approval, and which may include super voting, special approval, dividend, or other rights or preferences superior to the rights of the holders of common stock;

 

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prohibit stockholder action by written consent, which requires all stockholder actions to be taken at a meeting of our stockholders;

 

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provide that the board of directors is expressly authorized to make, alter, or repeal our bylaws; and

 

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establish advance notice requirements for nominations for elections to our board or for proposing matters that can be acted upon by stockholders at stockholder meetings.

Our certificate of incorporation will also contain a provision that provides us with protections similar to Section 203 of the Delaware General Corporate Law, and will prevent us from engaging in a business combination with a person who acquires at least 15% of our common stock for a period of three years from the date such person acquired such common stock, except for Golden Gate and, in certain instances, persons who purchase common stock from Golden Gate and unless board or stockholder approval is obtained prior to the

 

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acquisition. These anti-takeover provisions and other provisions under Delaware law could discourage, delay or prevent a transaction involving a change in control of our company, even if doing so would benefit our stockholders. These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors of your choosing and to cause us to take other corporate actions you desire.

If you purchase shares of common stock sold in this offering, you will incur immediate and substantial dilution.

If you purchase shares of common stock in this offering, you will incur immediate and substantial dilution in the amount of $20.11 per share, because the initial public offering price of $19.00 is substantially higher than the pro forma net tangible book value per share of our outstanding common stock. This dilution is due in large part to the fact that our earlier investors paid substantially less than the initial public offering price when they purchased their shares, and as of April 3, 2010 have received an aggregate of $687.6 million of cash distributions (which includes $507.0 million distributed to Golden Gate), other than tax distributions, from us since the Golden Gate Acquisition. In addition, you may also experience additional dilution upon future equity issuances or the exercise of stock options to purchase common stock granted to our employees, consultants and directors under our stock option and equity incentive plans. See “Dilution.”

If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline.

The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business. We do not currently have and may never obtain research coverage by securities and industry analysts. If no securities or industry analysts commence coverage of our company, the trading price for our stock would be negatively impacted. If we obtain securities or industry analyst coverage and if one or more of the analysts who covers us downgrades our stock or publishes inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, demand for our stock could decrease, which could cause our stock price and trading volume to decline.

We do not expect to pay any cash dividends for the foreseeable future.

The continued operation and expansion of our business will require substantial funding. Accordingly, we do not anticipate that we will pay any cash dividends on shares of our common stock for the foreseeable future. Any determination to pay dividends in the future will be at the discretion of our board of directors and will depend upon results of operations, financial condition, contractual restrictions, restrictions imposed by applicable law and other factors our board of directors deems relevant. Additionally, our operating subsidiaries are currently restricted from paying cash dividends by the agreements governing their indebtedness, and we expect these restrictions to continue in the future. Accordingly, if you purchase shares in this offering, realization of a gain on your investment will depend on the appreciation of the price of our common stock, which may never occur. Investors seeking cash dividends in the foreseeable future should not purchase our common stock.

We will incur increased costs as a result of becoming a public company.

As a public company, we will incur significant legal, accounting, insurance and other expenses that we have not incurred as a private company, including costs associated with public company reporting requirements. We also have incurred and will incur costs associated with complying with the requirements of the Sarbanes-Oxley Act of 2002 and related rules implemented by the Securities and Exchange Commission (“SEC”) and the NYSE. The expenses incurred by public companies generally for reporting and corporate governance purposes have been increasing. We expect these rules and regulations to increase our legal and financial compliance costs and to make some activities more time-consuming and costly, although we are currently unable to estimate these costs with any degree of certainty. These laws and regulations could also make it more difficult or costly for us to

 

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obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. These laws and regulations could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as our executive officers. Furthermore, if we are unable to satisfy our obligations as a public company, we could be subject to delisting of our common stock, fines, sanctions and other regulatory action and potentially civil litigation.

Compliance with Section 404 of the Sarbanes-Oxley Act of 2002 will require significant expenditures and effort by management, and if our independent registered public accounting firm is unable to provide an unqualified attestation report on our internal controls, our stock price could be adversely affected.

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 and related rules and regulations and beginning with our Annual Report on Form 10-K for the year ending January 28, 2012, our management will be required to report on, and our independent registered public accounting firm to attest to, the effectiveness of our internal control over financial reporting. The rules governing the standards that must be met for management to assess our internal control over financial reporting are complex and require significant documentation, testing and possible remediation. We are currently in the process of reviewing, documenting and testing our internal control over financial reporting. We may encounter problems or delays in completing the implementation of any changes necessary to make a favorable assessment of our internal control over financial reporting. In addition, in connection with the attestation process by our independent registered public accounting firm, we may encounter problems or delays in completing the implementation of any requested improvements and receiving a favorable attestation. If we cannot favorably assess the effectiveness of our internal control over financial reporting, or if our independent registered public accounting firm is unable to provide an unqualified attestation report on our internal controls, investors could lose confidence in our financial information and our stock price could decline.

 

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FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements that are subject to risks and uncertainties. All statements other than statements of historical fact included in this prospectus 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, growth rates and financial results, our plans and objectives for future operations, growth or initiatives, strategies, the Reorganization 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 store events, promotions and 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 for the manufacture of all of our merchandise;

 

•

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 our distribution facilities;

 

•

our reliance upon independent third-party transportation providers for substantially all of our product shipments;

 

•

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 reflect our brand image and embody our culture;

 

•

our dependence upon key executive management;

 

•

our reliance on Limited Brands to provide us with certain key services for our business;

 

•

our reliance on information systems;

 

•

system security risk issues that could disrupt our internal operations or information technology services;

 

•

changes in laws and regulations applicable to our business;

•

our inability to protect our trademarks or other intellectual property rights;

 

•

our limited operating history as a standalone company;

 

•

fluctuations in energy costs;

 

•

changes in taxation requirements or the results of tax audits;

 

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•

claims made against us resulting in litigation;

 

•

our substantial indebtedness and lease obligations;

 

•

restrictions imposed by our indebtedness on our current and future operations;

 

•

increased costs as a result of being a public company; 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. Important factors that could cause actual results to differ materially from our expectations, or cautionary statements, are disclosed under the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this prospectus. All written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the cautionary statements as well as other cautionary statements that are made from time to time in our other SEC filings and public communications. You should evaluate all forward-looking statements made in this prospectus in the context of these risks and uncertainties.

We caution you that the important factors referenced above may not contain all of the factors that are important to you. In addition, we cannot assure you that we will realize the results or developments we expect or anticipate or, even if substantially realized, that they will result in the consequences or affect us or our operations in the way we expect. The forward-looking statements included in this prospectus 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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USE OF PROCEEDS

We estimate based upon an assumed initial public offering price of $19.00 per share, the midpoint of the range set forth on the cover of this prospectus, we will receive net proceeds from the offering of approximately $186.5 million, after deducting underwriting discounts and commissions but before deducting $4.0 million of estimated offering expenses payable by us. We will not receive any proceeds from the sale of shares of our common stock by the selling stockholders, including any shares sold by the selling stockholders in connection with the exercise of the underwriters’ option to purchase additional shares.

We intend to use the net proceeds from this offering to prepay all of the Term B Loans outstanding under the Topco credit facility, to pay accrued and unpaid interest and prepayment penalties and to pay other fees and expenses incurred in connection with this offering, including payments to Golden Gate and Limited Brands. See “Certain Relationships and Related Party Transactions.” We will use any remaining net proceeds from this offering for general corporate purposes.

The following table summarizes the estimated sources and uses of funds in connection with the offering.

 

Sources of funds:		Amount		Uses of funds		Amount
Net proceeds to us		$186.5		Prepayment of Term B Loans(1)		$164.5
				Payments to Golden Gate and Limited Brands(2)		13.3
				Other fees and expenses		4.0
				General corporate purposes		4.7
Total sources of funds		$186.5		Total uses of funds		$186.5

 

(1)

Includes $150.0 million aggregate principal amount ($147.5 million net of unamortized original issue discount) outstanding of Term B Loans, accrued and unpaid interest of $5.5 million as of May 11, 2010 and a prepayment penalty of $9.0 million. A pro rata portion of this amount will be paid to each of GGC Unlevered Credit Opportunities, LLC, an investment fund managed by Golden Gate, and another affiliate of Golden Gate, each in their capacity as a lender of $50.0 million and $8.3 million of the principal amount of Term B Loans, respectively. Accrued and unpaid interest on the Term B Loans as of January 30, 2010 was $10.2 million and was paid on February 1, 2010.

 

(2)

Includes payments of $10.0 million to Golden Gate to terminate the Advisory Agreement and $3.3 million to Limited Brands to terminate its advisory arrangement in the LLC Agreement.

As of January 30, 2010, we had $150.0 million aggregate principal amount of indebtedness outstanding ($147.4 million net of unamortized original issue discount) under the Term B Loans and $150.0 million aggregate principal amount of indebtedness outstanding ($147.5 million net of unamortized original issue discount) under the Term C Loans under our Topco credit facility. On March 5, 2010, in connection with the 2010 Refinancing Transactions, we prepaid all of the Term C Loans. The Term B Loans have a maturity date of June 26, 2015. Borrowings under our Term B Loans bear interest at a rate of 13.5% per annum and we expect to incur a prepayment penalty associated with the prepayment of the Term B Loans. See “Description of Certain Indebtedness.” GGC Unlevered Credit Opportunities, LLC, an investment fund managed by Golden Gate, and another affiliate of Golden Gate are lenders under the Topco credit facility and hold $50.0 million and $8.3 million in principal amount of Term B Loans, respectively. Upon prepayment of the Term B Loans with the net proceeds to us from this offering, all amounts outstanding under the Topco credit facility will have been repaid and that facility will be terminated.

A $1.00 increase or decrease in the assumed initial public offering price of $19.00 per share would increase or decrease the net proceeds we receive from this offering by approximately $9.8 million, assuming the number of shares offered by us, as set forth on the cover of this prospectus, remains the same.

 

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DIVIDEND POLICY

We currently intend to retain all available funds and any future earnings to fund the development and growth of our business and to repay indebtedness, and therefore we do not anticipate paying any cash dividends in the foreseeable future. Additionally, because we are a holding company, our ability to pay dividends on our common stock is limited by restrictions on the ability of our subsidiaries to pay dividends or make distributions to us, including restrictions under the terms of the agreements governing our indebtedness. See “Description of Certain Indebtedness.” Any future determination to pay dividends will be at the discretion of our board of directors, subject to compliance with covenants in current and future agreements governing our indebtedness, and will depend upon our results of operations, financial condition, capital requirements and other factors that our board of directors deems relevant.

Pursuant to our limited liability company agreement, we paid cash distributions to our equity holders to fund their tax obligations in respect of their equity interests on March 25, 2008, April 18, 2008, December 22, 2009, January 26, 2010 and May 4, 2010 in aggregate amounts of $26.0 million, $7.6 million, $15.0 million, $18.0 million and $31.0 million, respectively. See “Certain Relationships and Related Party Transactions—LLC Agreement.” In addition, in April 2008 we made a distribution to our equity holders in an aggregate amount of $168.0 million, in July 2008 we made a distribution to our equity holders in an aggregate amount of $289.5 million and in March 2010, in connection with the 2010 Refinancing Transactions, we made a distribution to our equity holders in an aggregate amount of $230.0 million. As of May 4, 2010 Golden Gate had been paid an aggregate of $577.8 million in these distributions, including distributions for taxes.

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and our capitalization as of January 30, 2010 on:

 

•

an actual basis;

 

•

a pro forma basis to give effect to the following:

 

•

the 2010 Refinancing Transactions as described under the section entitled “Prospectus Summary—Recent Developments;”

 

•

the Reorganization as described under the section entitled “Prospectus Summary—Reorganization as a Corporation;”

 

•

the use of $199.5 million of the proceeds to us in this offering from the sale of 10.5 million shares to prepay all of the Term B Loans plus accrued and unpaid interest and prepayment penalties in connection with the prepayment of the Term B Loans and to pay fees and expenses incurred in connection with this offering, including underwriters discounts and payments to Golden Gate and Limited Brands.

 

•

on a pro forma as adjusted basis to give effect to the use of any remaining proceeds of this offering for general corporate purposes.

You should read the following table in conjunction with the sections entitled “Use of Proceeds,” “Selected Historical Consolidated Financial and Operating Data,” “Unaudited Pro Forma Condensed Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus.

 

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		As of January 30, 2010
		Actual				Pro Forma			Pro Forma As Adjusted(1)
		(unaudited) (dollars in thousands, except per share data)
Cash and cash equivalents(2)		$	234,404			$	86,139		$	86,139
Debt, including current portion:
Opco long-term liabilities:
Opco revolving credit facility(2)		$	—			$	—		$	—
Opco term loan			121,875				121,875			121,875
8¾% Senior Notes due 2018			—				246,497			246,497
Topco long-term liabilities:
Term B Loans(3)			147,437				—			—
Term C Loans(3)			147,451				—			—
Total long term debt, including current portion			416,763				368,372			368,372
Members’ interests/stockholders’ equity:
Members’ Units			141,214				—			—
Common stock, $0.01 par value per share, authorized; 88.7 million shares issued and outstanding, on a pro forma basis; 88.7 million shares issued and outstanding, on a pro forma as adjusted basis			—				887			887
Additional paid-in capital			—				125,650			125,650
Retained earnings (accumulated deficit)			5,872				(17,544)			(17,544)
Notes receivable			(5,633	)			—			—
Total members’ interests/stockholders’ equity			141,453				108,993			108,993
Total capitalization		$	558,216			$	477,365		$	477,365

 

(1)

A $1.00 increase or decrease in the assumed initial public offering price of $19.00 per share, the midpoint of the range set forth on the cover page of this prospectus, would increase or decrease the net proceeds from this offering available to us to prepay the Term B Loans and correspondingly increase or decrease the amount of additional paid-in capital, total stockholders’ equity and total capitalization by approximately $9.8 million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. See “Use of Proceeds.”

(2)

As of April 3, 2010, we had $56.7 million of cash and cash equivalents, $139.6 million of availability and no borrowings outstanding under the Opco revolving credit facility. Accrued and unpaid interest of $10.2 million outstanding on our Term B Loans as of January 30, 2010 was paid on February 1, 2010, and we estimate that as of May 11, 2010 we will have $5.5 million of accrued and unpaid interest outstanding under our Term B Loans.

(3)

GGC Unlevered Credit Opportunities, LLC, an investment fund managed by Golden Gate, is a lender under the Topco credit facility and holds $50.0 million in principal amount of Term B Loans and held $50.0 million in the principal amount of Term C Loans which were prepaid on March 5, 2010 in connection with the 2010 Refinancing Transactions. A separate affiliate of Golden Gate purchased an additional $8.3 million of principal amount of Term B Loans on April 8, 2010. See “Certain Relationships and Related Party Transactions.” As of January 30, 2010, the principal balances of the Term B Loans and Term C Loans reflect $2.6 million and $2.5 million, respectively, of unamortized original issue discount.

The information set forth above excludes 1,315,500 shares of our common stock issuable upon the exercise of options to be issued in connection with this offering and 12,500 shares of our common stock subject to restricted stock units that we expect to grant in connection with this offering, as well as 13,672,000 shares of common stock that will remain as reserved for future issuance under our 2010 Incentive Compensation Plan following this option grant and restricted stock unit issuance.

 

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DILUTION

Our pro forma net tangible book value as of January 30, 2010, before giving effect to the sale by us of 10.5 million shares of common stock offered in this offering, but after giving effect to the 2010 Refinancing Transactions and assuming the completion of the Reorganization, was approximately $(269.9) million, or approximately $(3.47) per share. Pro forma net tangible book value (deficit) per share represents the amount of our total tangible assets less the amount of our total liabilities, divided by the number of shares of common stock outstanding at January 30, 2010, prior to the sale by us of 10.5 million shares of common stock offered in this offering, but after giving effect to the 2010 Refinancing Transactions and assuming the completion of the Reorganization. Dilution in pro forma net tangible book value (deficit) per share represents the difference between the amount per share paid by investors in this offering and the net tangible book value (deficit) per share of our common stock outstanding immediately after this offering.

After giving effect to the completion of the 2010 Refinancing Transactions, the Reorganization and the sale by us of 10.5 million shares of common stock in this offering, based upon an assumed initial public offering price of $19.00 per share, the midpoint of the range set forth on the cover of this prospectus, after deducting underwriting discounts and commissions, a non-cash charge for the early extinguishment of debt and estimated expenses payable by us in connection with this offering, our pro forma as adjusted net tangible book value as of January 30, 2010 would have been approximately $(97.8) million, or $(1.11) per share of common stock. This represents an immediate increase in pro forma net tangible book value of $2.36 per share to existing stockholders and immediate dilution of $20.11 per share to new investors purchasing shares of common stock in this offering at the initial public offering price.

The following table illustrates this dilution in pro forma as adjusted net tangible book value to new investors:

 

Assumed initial public offering price per share						$	19.00
Pro forma net tangible book value per share as of January 30, 2010 (after giving effect to the 2010 Refinancing Transactions and Reorganization)		$	(3.47	)
Increase in pro forma tangible book value per share to existing shareholders attributable to this offering			2.36
Pro forma net tangible book value per share as of January 30, 2010 (after giving effect to the 2010 Refinancing Transactions, the Reorganization and this offering)							(1.11	)
Dilution per share to new investors						$	20.11

 

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The following table summarizes, as of January 30, 2010, on a pro forma as adjusted basis, the number of shares of our common stock purchased from us, the aggregate cash consideration paid to us and the average price per share paid to us by existing stockholders, which has been determined without regard to any distributions on, or accretion of liquidation value of, our limited liability company interests prior to the Reorganization including in the case of Golden Gate, who purchased their equity interests in us for $484.9 million, and to be paid by new investors purchasing shares of our common stock from us in this offering. Our existing equity holders have received an aggregate of $687.6 million of distributions (excluding distributions in respect of taxes incurred by our equity holders as a result of our partnership status) from us since the Golden Gate Acquisition, of which $507.0 million was distributed to Golden Gate. The table assumes an initial public offering price of $19.00 per share, the midpoint of the range set forth on the cover of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us in connection with this offering:

 

		Shares Purchased					Total Consideration						Average  Price Per Share
		Number		Percentage			Amount			Percentage
Existing stockholders		77.7		88	%		$	657.8		77	%		$	8.47
New investors		10.5		12				199.5		23				19.00
Total		88.2		100	%		$	857.3		100	%

A $1.00 increase (decrease) in the assumed initial public offering price of $19.00 per share, the midpoint of the price range set forth on the cover of this prospectus, would increase (decrease) the total consideration paid by investors participating in this offering by $9.8 million, or increase (decrease) the percent of total consideration paid by investors participating in this offering by 5%, assuming that the number of shares offered by us, as set forth on the cover of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

The sale of 5.5 million shares of common stock to be sold by the selling stockholders in this offering will reduce the number of shares held by existing stockholders to 72.2 million, or 82% of the total shares outstanding, and will increase the number of shares held by investors participating in this offering to 16.0 million, or 18% of the total shares outstanding. In addition, if the underwriters’ option to purchase additional shares is exercised in full, the number of shares of common stock held by existing stockholders will be further reduced to 69.8 million, or 79% of the total number of shares of common stock to be outstanding upon the closing of this offering, and the number of shares of common stock held by investors participating in this offering will be further increased to 18.4 million shares or 21% of the total number of shares of common stock to be outstanding upon the closing of this offering.

The tables and calculations above are based on 88.2 million shares of common stock issued and outstanding as of January 30, 2010, on a pro forma basis to give effect to the 2010 Refinancing Transactions and the Reorganization, and excludes 529,499 restricted stock units subject to vesting, 1,315,500 shares of our common stock issuable upon the exercise of options and 12,500 shares of common stock subject to restricted stock units that we expect to grant in connection with this offering, as well as 13,672,000 remaining shares of common stock reserved for issuance under our 2010 Incentive Compensation Plan, which we plan to adopt in connection with this offering.

To the extent that any outstanding options are exercised, new investors will experience further dilution.

 

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UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA

The following unaudited pro forma condensed consolidated data sets forth our unaudited pro forma and historical consolidated statement of operations for the year ended January 30, 2010 and our unaudited pro forma balance sheet at January 30, 2010. Such information is based on the audited consolidated financial statements of Express Parent appearing elsewhere in this prospectus.

The unaudited pro forma condensed consolidated balance sheet at January 30, 2010, and the unaudited pro forma condensed consolidated statement of operations for the year ended January 30, 2010, give effect to the following as if each had occurred on January 30, 2010 for the unaudited pro forma condensed consolidated balance sheet and on February 1, 2009 for the unaudited pro forma condensed consolidated statement of operations:

 

•

2010 Refinancing Transactions. On March 5, 2010, we issued, in a private placement, $250.0 million of 8¾% Senior Notes due 2018 at an offering price of 98.599% of the face value of the Senior Notes. An affiliate of Golden Gate purchased $50.0 million of the Senior Notes in the offering. The proceeds from the Senior Notes of $246.5 million, together with cash on hand of $153.8 million, were used to (1) prepay all of the Term C Loans outstanding under the Topco credit facility of our wholly-owned subsidiary, Express Topco, and to pay accrued and unpaid interest and prepayment penalties in an aggregate amount equal to $154.9 million, (2) make a distribution to the equity holders of Express Parent in an aggregate amount equal to $230.0 million and (3) pay related transaction fees and expenses, including discounts and commissions to the initial purchasers of the Senior Notes, in an aggregate amount equal to $15.4 million.

 

•

Reorganization. We are currently a Delaware limited liability company. Immediately after our registration statement for this offering is declared effective, and prior to the sale of any of our shares of common stock, we will convert into a Delaware corporation and change our name from Express Parent LLC to Express, Inc. Upon the conversion, all of our outstanding Class L Common Units, Class A Common Units and Class C Common Units will automatically be converted into shares of our common stock based on their relative rights as set forth in our LLC Agreement. Upon the conversion, all of our outstanding Class L Common Units, Class A Common Units and Class C Common Units will automatically be converted into shares of common stock of Express, Inc.

Prior to our registration statement being declared effective, (1) EIC, the holding company that holds 67.3% of the equity interests in us on behalf of certain investment funds managed by Golden Gate and (2) the Management Holding Companies that directly or indirectly hold 6.1% of the equity interests in us will be merged with and into us. EIC does not have any independent operations or any significant assets or liabilities and does not comprise a business. Accordingly, this legal merger represents in substance a reorganization and transfer of EIC’s income tax payables or receivables between entities under common control. Accordingly, for financial reporting purposes, the transaction will be reflected as a contribution of certain of EIC’s income tax payables or receivables to us, in exchange for a net receivable or payable of equal amount with an affiliate of Golden Gate. In connection with the conversion and these mergers, Golden Gate (indirectly through a limited liability company) and certain members of our management will receive, in exchange for their equity interests in the entities being merged into us, the number of shares of our common stock that they would have held had they held our equity interests directly.

 

•

Initial Public Offering. The issuance of 10.5 million shares of common stock in this offering at a price equal to $19.00 per share, the midpoint of the price range set forth on the cover of this prospectus, and the use of proceeds to (1) prepay all of the Term B Loans outstanding under the Topco credit facility and to pay accrued and unpaid interest and prepayment penalties in an aggregate amount equal to approximately $169.2 million (accrued and unpaid interest of $10.2 million as of January 30, 2010 was paid on February 1, 2010) and (2) pay related transaction fees and expenses, including the underwriters’ discounts and commissions, in an aggregate amount equal to approximately $30.3 million.

 

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The unaudited pro forma condensed consolidated statement of operations does not reflect the following items due to their non-recurring nature: (1) transaction fees and related expenses payable to Golden Gate pursuant to our Advisory Agreement with them of $2.7 million related to the issuance of our Senior Notes and a fee to terminate this Advisory Agreement in the amount of $10.0 million, (2) a fee payable to Limited Brands of $3.3 million to terminate its advisory fee arrangement in the LLC Agreement, (3) the recognition of a net deferred tax asset of approximately $35.4 million upon our change in tax status, (4) the payment of prepayment penalties of $12.0 million and write-off of deferred financing costs of $3.3 million related to the prepayments of our Topco credit facility and (5) stock based compensation of $1.5 million due to accelerated vesting of certain A and C units. See “Certain Relationships and Related Party Transactions.”

The unaudited pro forma adjustments are based on available information and certain assumptions that we believe are reasonable. The unaudited pro forma condensed consolidated financial information was prepared on a basis consistent with that used in preparing our audited consolidated financial statements and includes all adjustments, consisting of normal and recurring items, that we consider necessary for a fair presentation of our financial position and results of operations for the unaudited periods.

The unaudited pro forma condensed consolidated financial information should be read in conjunction with the sections of this prospectus entitled “Use of Proceeds,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our historical consolidated financial statements and related notes thereto included elsewhere in this prospectus. The unaudited pro forma condensed consolidated financial information is for informational purposes only and is not intended to represent or be indicative of the consolidated results of operations or financial position that we would have reported had the structuring transactions and this offering been completed on the dates indicated and should not be taken as representative of our future consolidated results of operations or financial position.

 

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EXPRESS PARENT LLC

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET

AT JANUARY 30, 2010

 

		Historical				Pro Forma Adjustments																		Pro Forma
						2010 Refinancing Transactions						Reorganization						Initial Public Offering
		(unaudited)
		(dollars in thousands)
Assets
Current assets
Cash and cash equivalents		$	234,404			$	(153,898	)		(A)		$	—					$	5,633			(J)		$	86,139
Receivables, net			4,377				—						—						—						4,377
Inventories			171,704				—						—						—						171,704
Prepaid minimum rent			20,874				—						—						—						20,874
Other			5,289				—						12,451			(G)			10,483			(K)			28,223
Total current assets			436,648				(153,898	)					12,451						16,116						311,317
Property and equipment, net			215,237				—						—						—						215,237
Tradename/domain name			197,414				—						—						—						197,414
Other assets			20,255				7,621			(B)			22,925			(G)			(1,642	)		(L)			49,159
Total assets		$	869,554			$	(146,277	)				$	35,376					$	14,474					$	773,127
Liabilities and equity
Current liabilities
Accounts payable		$	61,093			$	—					$	—					$	—					$	61,093
Deferred revenue			22,247				—						—						—						22,247
Accrued bonus			22,541				—						—						—						22,541
Accrued expenses			73,576				(5,423	)		(C)			—						(10,153	)		(M)			58,000
Accounts payable and accrued expenses—related parties			89,831				—						—						—						89,831
Total current liabilities			269,288				(5,423	)					—						(10,153	)					253,712
Long-term debt			415,513				(147,451	)		(C)			—						(147,437	)		(M)			367,122
							246,497			(D)			—						—
Other long-term liabilities			43,300				—						—						—						43,300
Total liabilities			728,101				93,623						—						(157,590	)					664,134
Members’ interests			141,214				(141,214	)		(E)			—						—						—
Common stock			—				—						782			(H)			105			(N)			887
Additional paid-in capital			—				—						(782	)		(H)			182,381			(N)			125,650
													35,376			(G)			1,489			(O)
													(92,814	)		(I)
Retained earnings (accumulated deficit)			5,872				(1,651	)		(B)			92,814			(I)			(1,642	)		(L)			(17,544	)
							(5,549	)		(C)			—						(11,563	)		(M)
							(88,786	)		(E)			—						(13,333	)		(P)
							(2,700	)		(F)			—						(1,489	)		(O)
							—						—						10,483			(K)
							—						—
Notes receivable			(5,633	)			—						—						5,633			(J)			—
Total equity			141,453				(239,900	)					35,376						172,064						108,993
Total liabilities and equity		$	869,554			$	(146,277	)				$	35,376					$	14,474					$	773,127

 

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EXPRESS PARENT LLC

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

FOR THE YEAR ENDED JANUARY 30, 2010

 

		Express Parent LLC				Pro Forma Adjustments																	Pro Forma
						2010 Refinancing Transactions				Reorganization							Initial Public Offering
		(unaudited)
		(dollars and units in thousands, except per unit and per share data)
Net sales		$	1,721,066			$	—			$	—						$	—					$	1,721,066
Cost of goods sold, buying and occupancy costs			1,175,088				—				—							—						1,175,088
Gross profit			545,978				—				—							—						545,978
General, administrative, and store operating expenses			409,198				—				—							—						409,198
Other operating expense, net			9,943				—				—							(9,427	)		(T)			516
Operating income			126,837				—				—							9,427						136,264
Interest expense			53,222				3,801	(Q)			—							(20,730	)		(U)			36,293
Interest income			(484	)			—				—							265			(J)			(219	)
Other income, net			(2,444	)			—				—							—						(2,444	)
Income before income taxes			76,543				(3,801	)			—							29,892						102,634
Provision for income taxes			1,236				—				26,908			(R	)			11,807			(R)			39,951
Net income		$	75,307			$	(3,801	)		$	(26,908	)					$	18,085					$	62,683
Class L:
Basic and diluted net income per unit		$	0.74
Basic and diluted weighted average units outstanding			101,742
Class A:
Basic and diluted net income per unit		$	—
Basic weighted average units outstanding			3,630
Diluted weighted average units outstanding			6,584
Class C:
Basic and diluted net income per unit		$	—
Basic weighted average units outstanding			1,816
Diluted weighted average units outstanding			3,087
Pro forma net income per share  (S)
Basic																							$	0.73
Diluted																								0.72
Pro forma weighted average shares outstanding  (S)
Basic																								86,302
Diluted																								86,945

 

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NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA

A. Reflects the following adjustments to cash and cash equivalents:

 

Prepayment of Topco Term C Loans (see footnote C)			$(158.4)
Issuance of Senior Notes net of original issue discount (see footnote D)			246.5
Distribution to equity holders (see footnote E)			(230.0	)
Other (see footnotes B and F)			(12.0	)
Total change in cash and cash equivalents		$	(153.9	)

B. Represents the net effect of the write-off of deferred debt financing costs associated with the Term C Loans under the Topco credit facility of $1.7 million, capitalization of debt financing costs associated with the issuance of the Senior Notes of $7.4 million and amendment fees and related expenses associated with the amendment of our existing credit facilities of $1.8 million for a total of $7.6 million.

C. Represents the prepayment of the $150.0 million principal amount of the Term C Loans under the Topco credit facility, the recognition of $2.5 million of unamortized original issue discount, payment of the prepayment penalty of $3.0 million and payment of accrued and unpaid interest of $5.4 million as of January 30, 2010. Accrued and unpaid interest was paid in full on February 1, 2010 as required by the credit agreement governing the Term C Loans under our Topco credit facility.

D. Represents the issuance of $250.0 million of Senior Notes net of the $3.5 million of original issue discount.

E. Represents the distribution to equity holders of $230.0 million out of proceeds from the issuance of the Senior Notes and cash on hand.

F. Reflects fees and expenses paid to Golden Gate in connection with the 2010 Refinancing Transaction as required by the Advisory Agreement.

G. Reflects adjustments to deferred income tax assets and liabilities in connection with the Reorganization. The deferred tax balances are primarily associated with timing differences between IRS tax regulations and GAAP financial accounting.

The Reorganization, for tax purposes, is deemed a contribution by Express Parent LLC of its assets and liabilities to Express, Inc., followed by the liquidation of Express Parent LLC. The Reorganization will result in a taxable gain to the partners which will correspondingly increase the tax basis in the assets acquired by Express, Inc. in the Reorganization. The tax basis of our assets and liabilities after the Reorganization will reflect the 75% step-up in the assets and liabilities acquired in the Golden Gate Acquisition and certain gains resulting from the Reorganization. As a result we will record a net deferred tax asset of approximately $ 35.0 million and a one-time, non-cash tax benefit of approximately $35.4 million. In addition, the merger of EIC with and into us may result in the transfer of certain of EIC’s income tax payables and receivables to us; however, as the parties will fund these liabilities prior to the merger, it is expected that such balances will not be material.

H. Represents the conversion of member units to common stock.

I. Represents a reclassification of historic accumulated deficit to additional paid-in capital due to the Reorganization.

J. Represents the repayment in full by each member of management, effective as of February 9, 2010, of loans made to management participants in our equity incentive plan in conjunction with their 2007 purchase of Class L Common Units, and elimination of interest income associated with these loans.

K. Represents the tax effect of the pro forma balance sheet adjustments at an assumed applicable tax rate of 39.5% which represents a federal statutory rate of 35% and a state statutory rate of 4.5%.

L. Represents the effect of the write-off of deferred debt financing costs associated with the Term B Loans under the Topco credit facility.

M. Represents the prepayment of the $150.0 million principal amount of the Term B Loans under the Topco credit facility, the recognition of $2.6 million of unamortized original issue discount, payment of the prepayment penalty of $9.0 million and payment of accrued and unpaid interest of $10.2 million as of January 30, 2010.

 

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Accrued and unpaid interest was paid in full on February 1, 2010 as required by the credit agreement governing the Term B Loans under our Topco credit facility.

N. Represents the sale of shares of our common stock in this offering, the net proceeds of which will be used to prepay of all of the Term B Loans outstanding under our Topco credit facility plus accrued and unpaid interest and prepayment penalties in connection with the prepayment of the Term B Loans, to pay a fee to terminate the Golden Gate Advisory Agreement, to pay a fee to terminate Limited Brands’ advisory fee arrangement under the LLC Agreement, to pay fees and expenses in connection with this offering and for general corporate purposes, assuming an initial public offering price of $19.00 per share, the midpoint of the price range set forth on the cover of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

O. Represents the acceleration of certain A and C units upon completion of this offering.

P. Reflects fees and expenses paid to Golden Gate required by the Advisory Agreement, a fee to terminate the Advisory Agreement payable to Golden Gate and a fee to terminate Limited Brands’s advisory fee arrangement under the LLC Agreement.

Q. Gives effect to (1) the prepayment of $150.0 million in outstanding Term C Loans under our existing Topco credit facility, (2) the issuance of the Senior Notes and (3) the increase in interest rates resulting from the amendment of our existing Opco term loan and Opco revolving credit facility in connection with the 2010 Refinancing Transactions.

 

		Year Ended January 30, 2010
Elimination of net interest expense on Term C Loans		$	(22.2	)
Net interest expense on Senior Notes			22.8
Increase in net interest expense associated with amending existing credit facilities			3.2
Total adjustment		$	3.8

R. As a limited liability company we were subject to taxes only in certain state and local tax jurisdictions. This adjustment represents our conversion to a corporation subject to federal tax obligations reflecting an effective tax rate of 38.71% and the tax effect of the pro forma adjustments at an assumed applicable tax rate of 39.5% which represents a federal statutory rate of 35% and a state statutory rate of 4.5%.

S. Represents the conversion of all of our outstanding Class L Common Units, Class A Common Units and Class C Common Units into shares of our common stock based on the equity value for our company based on an assumed initial public offering price of $19.00 per share, the midpoint of the price range set forth on the cover of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us and the issuance of shares of our common stock in this offering, the net proceeds of which will be used to prepay of all of the Term B Loans outstanding under our Topco credit facility plus accrued and unpaid interest and prepayment penalties in connection with the prepayment of the Term B Loans, to pay a fee to terminate the Golden Gate Advisory Agreement, to pay a fee to terminate Limited Brands’ advisory fee arrangement under the LLC Agreement, to pay fees and expenses in connection with this offering and for general corporate purposes, assuming an initial public offering price of $19.00 per share, the midpoint of the price range set forth on the cover of this prospectus.

T. In connection with this offering, our Advisory Agreement with Golden Gate and our advisory fee arrangement with Limited Brands under the LLC Agreement will terminate. Other operating expense, net has been adjusted to reflect the elimination of the annual management fees payable to Golden Gate and Limited Brands pursuant to our Advisory Agreement and the LLC Agreement, respectively.

U. Represents elimination of interest expense on the Term B Loans under the Topco credit facility due to its full prepayment.

 

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SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OPERATING DATA

The following tables set forth our selected historical consolidated financial and operating data as of the dates and for the periods indicated. We have derived the selected historical consolidated financial and operating data for the period ended July 6, 2007 and as of and for the fiscal period ended February 2, 2008 from our consolidated financial statements as of and for such fiscal periods, which were audited by Ernst & Young LLP, an independent registered public accounting firm. We have derived the selected historical consolidated financial and operating data as of and for the fiscal year ended February 3, 2007 from our audited consolidated financial statements, which are not included in this prospectus. We have derived the selected unaudited historical consolidated financial and operating data as of and for the year ended January 28, 2006, from our unaudited consolidated financial statements for such year, which include all adjustments, consisting of normal and recurring adjustments, that we consider necessary for a fair presentation of the financial position and results of operations for such year. We have derived the selected historical consolidated financial and operating data as of and for the fiscal years ended January 31, 2009 and January 30, 2010 from our consolidated financial statements as of and for such fiscal year, which were audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm. Our audited consolidated financial statements as of January 31, 2009 and January 30, 2010 and for the fiscal years or periods, as applicable, ended July 6, 2007, February 2, 2008, January 31, 2009 and January 30, 2010 have been included in this prospectus.

On July 6, 2007, investment funds managed by Golden Gate acquired 75% of the interest in our business from Limited Brands. As a result of the Golden Gate Acquisition, a new basis of accounting was created beginning July 7, 2007 for the Successor periods ending after such date. Prior to the Golden Gate Acquisition, our consolidated financial statements were prepared on a carve-out basis from Limited Brands. The carve-out consolidated financial statements include allocations of certain costs of Limited Brands. In the Successor periods we no longer incur these allocated costs, but do incur certain expenses as a standalone company for similar functions, including for certain support services provided by Limited Brands under the Limited Brands Transition Services Agreements, which is discussed further in the section entitled “Certain Relationships and Related Party Transactions.” These allocated costs were based upon various assumptions and estimates and actual results may differ from these allocated costs, assumptions and estimates. Accordingly, the carve-out consolidated financial statements may not be a comparable presentation of our financial position or results of operations as if we had operated as a standalone entity during the Predecessor periods. See “Risk Factors—We have a limited operating history as a standalone company, which may make it difficult to compare our current operating results to prior periods.”

 

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The selected historical consolidated data presented below should be read in conjunction with the sections entitled “Risk Factors,” “Unaudited Pro Forma Condensed Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the consolidated financial statements and related notes thereto and other financial data included elsewhere in this prospectus.

 

		Predecessor												Successor
		Year Ended								February 4, 2007 through July 6, 2007				July 7, 2007 through February 2, 2008				Year Ended
		January 28, 2006				February 3, 2007												January 31, 2009				January 30, 2010
		(unaudited)
		(dollars in thousands, excluding net sales per gross square foot data)
Statement of Operations Data:
Net sales		$	1,793,963			$	1,748,873			$	659,019			$	1,137,327			$	1,737,010			$	1,721,066
Cost of goods sold, buying and occupancy costs			1,435,343				1,254,762				451,514				890,063				1,280,018				1,175,088
Gross profit			358,620				494,111				207,505				247,264				456,992				545,978
General, administrative, and store operating expenses			461,847				470,117				170,100				275,150				447,071				409,198
Other operating expense, net			—				—				302				5,526				6,007				9,943
Operating (loss) income			(103,227	)			23,994				37,103				(33,412	)			3,914				126,837
Interest expense			—				—				—				6,978				36,531				53,222
Interest income			—				—				—				(5,190	)			(3,527	)			(484	)
Other expense (income), net			—				—				—				4,712				(300	)			(2,444	)
Income (loss) before income taxes			(103,227	)			23,994				37,103				(39,912	)			(28,790	)			76,543
Provision for income taxes			(41,154	)			6,525				7,161				487				246				1,236
Net (loss) income		$	(62,073	)		$	17,469			$	29,942			$	(40,399	)		$	(29,036	)		$	75,307
Pro forma net income per share(1)
Basic																						$	0.73
Diluted																						$	0.72
Pro forma weighted average shares(1)
Basic																							86,302
Diluted																							88,945
Statement of Cash Flows Data:
Net cash provided by (used in):
Operating activities		$	39,040			$	84,913			$	45,912			$	282,192			$	35,234			$	200,721
Investing activities			(72,184	)			(53,867	)			(22,888	)			(15,258	)			(51,801	)			(26,873	)
Financing activities			32,636				(24,130	)			(29,939	)			39,361				(127,347	)			(115,559	)
Other Financial and Operating Data:
Comparable store sales change(2)			(8	)%			(1	)%			6	%			12	%			(3	)%			(6	)%
Net sales per gross square foot(3)		$	263			$	282			$	118			$	213			$	337			$	321
Total gross square feet (in thousands) (average)			6,822				6,195				5,604				5,348				5,060				5,033
Number of stores (at period end)			743				658				622				587				581				573
Capital expenditures			72,184				53,867				22,888				15,258				50,551				26,853
Balance Sheet Data (at period end):
Cash and cash equivalents		$	13,733			$	20,649			$	—			$	320,029			$	176,115			$	234,404
Working capital (excluding cash and cash equivalents)(4)			60,253				60,455				—				(63,308	)			(28,317	)			(65,794	)
Total assets			483,346				479,184				—				1,025,817				860,413				869,554
Total debt (including current portion)			—				—				—				124,375				498,478				416,763
Total members’ equity			270,855				265,849				—				615,290				97,099				141,453

 

(1)

Unaudited pro forma net income (loss) per share gives effect to the 2010 Refinancing Transactions and the Reorganization and also includes 10.5 million shares expected to be issued in this offering, whose proceeds will be used to prepay all of the Term B Loans, plus accrued and unpaid interest and prepayment penalties. See “Unaudited Pro Forma Condensed Consolidated Financial Data.”

(2)

Comparable store sales have been calculated based upon stores that were open at least thirteen full fiscal months as of the end of the reporting period. For the year ended February 3, 2007, which was a fifty-three week year, sales from the fifty-third week were excluded from the calculation to present comparable periods.

(3)

Net sales per gross square foot is calculated by dividing net sales for the applicable period by the average gross square footage during such period. For the purpose of calculating net sales per gross square foot, e-commerce sales and other revenues are excluded from net sales.

(4)

Working capital is defined as current assets, less cash and cash equivalents, less current liabilities excluding the current portion of long-term debt.

 

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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 our company as of and for the periods presented below. The following discussion and analysis should be read in conjunction with the consolidated financial statements and the related notes thereto included elsewhere in this prospectus. 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, including those discussed below and elsewhere in this prospectus, particularly in the section entitled “Risk Factors.”

Overview

Express is the sixth largest specialty retail apparel brand in the United States. With 30 years of experience offering a distinct combination of style and quality at an attractive value, we believe we are a core shopping destination for our customers and that we have developed strong brand awareness and credibility with them. We target an attractive and growing demographic of women and men between 20 and 30 years old. We offer our customers an edited assortment of fashionable apparel and accessories to address fashion needs across multiple aspects of their lifestyles, including work, casual and going-out occasions. Since we became an independent company in 2007, we have made several significant changes to our business model, including completing the conversion of our stores to a dual-gender format, re-designing our go-to-market strategy and launching our e-commerce platform, all of which we believe have improved our operating profits and positioned us well for future growth and profitability.

As of January 30, 2010, we operated 573 stores. Our stores are located primarily in high-traffic shopping malls, lifestyle centers and street locations across the United States, and average approximately 8,700 square feet. We also sell our products through our e-commerce website, express.com. Our stores and website are designed to create an exciting shopping environment that reflects the sexy, sophisticated and social brand image that we seek to project. Our product offering includes both women’s and men’s apparel and accessories, of which women’s represented 67% of our net sales and men’s represented 33% of our net sales during fiscal 2009. Our product assortment is a mix of core styles balanced with the latest fashions, a combination we believe our customers look for and value from our brand. For fiscal 2009, we generated net sales, net income and Adjusted EBITDA of $1,721.1, $75.3 and $229.8 million, respectively. Our Adjusted EBITDA increased 168% from $85.9 million in fiscal 2006 to $229.8 million in fiscal 2009. See “Prospectus Summary—Summary Historical and Pro Forma Consolidated Financial and Operating Data” for a discussion of Adjusted EBITDA, an accompanying presentation of the most directly comparable GAAP financial measure and a reconciliation of the differences between Adjusted EBITDA and the most directly comparable GAAP financial measure, net income.

Factors Affecting Our Operating Results

Various factors affect our operating results during each period, including:

Overall Economic Trends. Consumer purchases of clothing generally remain constant or may increase during stable economic periods and decline during recessionary periods and other periods when disposable income is adversely affected. As a result, our results of operations during any given period are often impacted by the overall economic conditions in the markets in which we operate. According to the Bureau of Economic Analysis, during 2008, apparel expenditures in the United States decreased by 1% compared to 2007, and by 4% in 2009 compared to 2008, in each case primarily as a result of the global economic recession, in which the United States economy was significantly adversely affected by increased unemployment levels, high levels of consumer debt, reductions in net worth based on recent severe market declines, significant declines in residential real estate and mortgage markets and the resulting significant declines in consumer confidence. Similarly,

 

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primarily as a result of the overall decline in consumer spending due to the economic recession, our net sales decreased by 3.3% in fiscal 2008 compared to pro forma 2007 and decreased by 1% in fiscal 2009 compared to fiscal 2008.

Consumer Preferences and Fashion Trends. Our ability to maintain our appeal to our existing customers and to attract new customers depends on our ability to anticipate fashion trends. Periods in which we have successfully anticipated fashion trends generally have had more favorable results. If we misjudge the market for our products, we may be faced with significant excess inventories for some products and be required to mark down those products in order to sell them or we may be required to discard those products, either of which would impact our gross profit. In recent periods we have redesigned our go-to-market strategy by focusing on early season testing and managing timing on purchases and production to reduce our exposure to changes in specific styles, which we believe has led to higher product margins from reduced markdowns and lower inventory risk.

Competition. The retail industry is highly competitive, and retailers compete based on a variety of factors, including design, quality, price and customer service. Levels of competition and the ability of our competitors to more accurately predict fashion trends and otherwise attract customers through competitive pricing or other factors impact our results of operations.

Pricing and Changes in Our Merchandise Mix. Our fashion offerings change from period to period, so the prices at which goods are sold and the margins we are able to earn from those goods also change. For example, if an item with a high price and/or a high margin is popular with our customers, then our results will be positively impacted. In fiscal 2009, for instance, our margins were positively impacted by increases in sales in items within our accessories assortment, all of which have high margins. The levels at which we are able to price our merchandise are influenced by a variety of factors, including the quality of the product, cost of production for those products, prices at which our competitors are selling similar items and willingness of our customers to pay for higher priced items. During certain periods we reduce prices or put items on sale if we determine that we need to do so in order to sell inventory before fashion seasons change. For instance, during the third and fourth quarters of 2008, we had disproportionately higher markdowns on excess inventory due to the global economic recession, which resulted in a decrease in our product margins for 2008. In some cases, we have increased prices for specific items if it was supported by customer demand.

The Timing of Our Releases of New Merchandise and Promotional Events. We incur expenditures relating to planning and production when we release new merchandise. If a release is successful, this new merchandise will have a positive impact on our sales until consumer preferences change or until those items are replaced in our stores by new items. Promotional events are intended to generate increased consumer awareness of our products and to increase sales in later periods. These may result in increased expenses in the periods in which the promotions are taking place, with the intent of increasing sales in later periods.

Seasonality. Our business is seasonal. As a result, our net sales fluctuate from quarter to quarter, which often affects the comparability of our results between periods. Net sales are historically higher in the third and fourth fiscal quarters due primarily to early Fall selling patterns and the impact of the holiday season. Generally, the annual sales split is 45% for the Spring season (February through July) and 55% for the Fall season (August through January). Working capital requirements are typically higher in the second and fourth quarters due to inventory-related working capital requirements for holiday and early Fall selling periods.

Changes in Sales Mix Among Sales Channels. Our results of operations may vary according to the amount of products we sell in our stores versus the amount of products we sell through e-commerce. Most of our store operating costs are fixed in the short term, with the exceptions of incentive compensation for our employees and discretionary spending, while our e-commerce operating model has a larger variable cost component and depends in large part on the amount of goods sold. Our sales from e-commerce increased by 231% from 2008 (which reflects sales after we launched our website in July 2008) to 2009, and comprised 1.6% of our net sales in 2008 and 5.3% of our net sales in 2009. As sales from e-commerce continue to increase, we expect our gross margins to be positively affected.

 

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Our Ability to Source and Distribute Products Effectively. Our costs of sales are impacted by our ability to find third parties who can manufacture our products at favorable costs while maintaining the levels of quality that we desire to deliver to our customers. Our costs of distribution are affected by a number of items, such as the cost of fuel and the amount of product being transported though similar distribution networks in the markets in which we operate (which affects our ability to obtain more favorable pricing with our providers).

The Number of Stores We Open, Close and Convert to a Dual-Gender Format in Any Period. During any period in which we are constructing additional stores, we will incur capital expenditures as a result of that expansion. In the past, when we converted stores to a dual-gender format, we incurred capital expenditures. Because our dual-gender store conversion efforts are complete, store conversions are not expected to have a significant impact on our results going forward. The number of stores that we operate in any period will impact our results for that period.

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 and comparable store sales and other individual store performance factors, gross profit and general, administrative and store operating expenses. We also review other metrics such as EBITDA and Adjusted EBITDA.

Net Sales. Net sales reflects our revenues from the sale of our merchandise less returns and discounts, as well as shipping and handling revenue received related to e-commerce and royalties received from our international development agreements.

Comparable Store Sales and Other Individual Store Performance Factors. Comparable store sales have been calculated based upon stores that were open at least thirteen full fiscal months as of the end of the reporting period. A store is not considered a part of the comparable store sales base if the square footage of the store changed by more than 20% due to remodel or relocation activities. As we continue to increase our number of stores, we expect that non-comparable store sales will contribute to our total net sales. We also review sales per gross square foot, average unit retail price, units per transaction, dollars per transaction, traffic and conversion, among other things, in order to evaluate the performance of individual stores. We also review sales per gross square foot on a company-wide basis.

Gross Profit. Gross profit is equal to our net sales minus cost of goods sold, buying and occupancy costs. Gross margin measures gross profit as a percentage of our net sales. Cost of goods sold, buying and occupancy costs includes the direct cost of purchased merchandise, inventory shrinkage, inventory write-downs, inbound freight, all freight costs to get merchandise to our stores, design, buying, allocation and production costs, occupancy costs related to store operations, such as rent and common area maintenance, utilities and depreciation on assets, and all logistics costs associated with our e-commerce business.

Our cost of goods sold, buying and occupancy costs increase in higher volume quarters because we purchase more merchandise for sale. Buying and occupancy costs are largely fixed and do not necessarily increase as volume increases. Changes in the mix of our products, such as changes in the proportion of accessories, which are higher margin, may also impact our overall cost of goods sold, buying and occupancy costs. We review our inventory levels on an ongoing basis in order to identify slow-moving merchandise and generally use markdowns to clear that merchandise. The timing and level of markdowns are driven primarily by customer acceptance of our merchandise. We use a third party vendor to dispose of marked-out-of-stock merchandise which, in turn, is sold to third party discounters. The primary drivers of the costs of individual goods are the raw materials, labor in the countries where we source our merchandise and logistics costs.

General, Administrative, and Store Operating Expenses. General, administrative and store operating expenses include all operating costs not included in cost of goods sold, buying and occupancy costs. These

 

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expenses include payroll and other expenses related to operations at our headquarters, store expenses, other than occupancy, and marketing expense, which primarily includes production, mailing and print advertising costs. These expenses generally do not vary proportionally with net sales. As a result, general, administrative and store operating expenses as a percentage of net sales is usually higher in lower volume quarters and lower in higher volume quarters.

Other Operating Expense, net. Other operating expense, net includes advisory fees paid to Golden Gate under the terms of our Advisory Agreement with them and to Limited Brands under the terms of the LLC Agreement. See “Certain Relationships and Related Party Transactions.” Changes in other operating expense, net relates primarily to changes in the advisory fees which are calculated as a percent of Adjusted EBITDA.

Other Factors Affecting Our Results

Certain important factors impacted the results presented in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” including (1) the Golden Gate Acquisition, (2) our transition from a division of Limited Brands to a standalone private company and (3) our tax structure. In the future, our results will be impacted by costs we incur as a public company, our change in tax status as a result of the Reorganization, and the prepayment of our Term C Loans which occurred concurrently with the issuance of our Senior Notes on March 5, 2010.

Purchase Accounting Impact of Golden Gate Acquisition. On July 6, 2007, we were acquired by investment funds managed by Golden Gate through a transaction that was accounted for under SFAS 141, “Business Combinations.” The purchase price was allocated to state our assets and liabilities at fair value. The allocation of the purchase price had the effect of increasing the carrying amount of inventory by $86.9 million, property and equipment by $38.5 million and amortizable intangible assets by $24.5 million. The $86.9 million increase in inventory value had the effect of reducing gross margin during pro forma fiscal 2007 and the 2007 Successor period. We have depreciated the $38.5 million increase in property and equipment over the useful life of each asset, which has had the effect of reducing gross margin in all periods subsequent to the Golden Gate Acquisition in 2007. The $24.5 million increase in amortizable intangible assets is being amortized over the remaining life of each asset and has reduced gross margin in all periods subsequent to the 2007 Golden Gate Acquisition.

Standalone Private and Public Company Costs. During our transition from a division of Limited Brands, a public company, to a standalone private company, we incurred one-time costs related to the establishment of infrastructure associated with information technology, tax, risk management, internal audit, treasury, real estate and benefits administration. Following the completion of this initial public offering, we will incur additional legal, accounting and other expenses that we did not incur as a private company, including costs associated with public company reporting and corporate governance requirements. These requirements include compliance with the Sarbanes-Oxley Act as well as other rules implemented by the SEC, and applicable stock exchange rules. We expect these rules and regulations to substantially increase our legal and financial compliance costs and to make certain financial reporting and other activities more time-consuming and costly.

Tax Structure. During the Predecessor periods, taxable income resulting from our operations was included in the consolidated income tax returns of Limited Brands. For the Predecessor period ended February 3, 2007, and through July 6, 2007, we operated as a division of Limited Brands, and reported income taxes on a separate company basis as if we were taxable as a corporation. As part of the Golden Gate Acquisition, Limited Brands, as the legal obligor, has retained income tax liabilities and related income tax contingencies and reserves arising out of our operations for any Predecessor periods.

Since the Golden Gate Acquisition, we have been treated as a partnership for tax purposes and therefore have not been subject to federal and state income tax (subject to exceptions in a limited number of state and local jurisdictions). Instead, our equity holders have been subject to income tax on their distributive share of our earnings and we have made distributions to them to fund their tax obligations.

 

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Prior to the completion of this offering, we intend to reorganize our existing holding company structure. See “Summary—Reorganization as a Corporation.” In connection with the Reorganization, we will elect to be treated as a corporation under Subchapter C of Chapter 1 of the Internal Revenue Code effective May 2, 2010 and we will be subject to federal and state income tax expense. The Reorganization, for tax purposes, is deemed a contribution by Express Parent LLC of its assets and liabilities to Express, Inc., followed by the liquidation of Express Parent LLC. The Reorganization will result in a taxable gain to the partners which will correspondingly increase the inside tax basis in the assets acquired by Express, Inc. in the Reorganization. The tax basis of our assets and liabilities after the Reorganization will reflect the 75% step-up in the assets and liabilities acquired in the Golden Gate Acquisition and certain gains resulting from the Reorganization. As a result we expect to record a net deferred tax asset and one time noncash tax benefit of approximately $35 million.

We expect our effective tax rate will be between 38% and 41% effective May 2, 2010 in connection with the Reorganization. Actual tax payments may differ from such effective tax rate due to timing and permanent differences between book income and taxable income.

The effective tax rate for the twenty-two weeks ended July 6, 2007 was 19.3%. The effective tax rate for the thirty-week period ended February 2, 2008, the fiscal year ended January 31, 2009 and the fiscal year ended January 30, 2010 was 1.2%, 0.9% and 1.6%, respectively. The difference in the effective tax rate for the twenty-two week period ended July 6, 2007 and the United States federal statutory rate of 35% is primarily attributable to the favorable impact of us becoming recognized as a partnership for federal income tax purposes effective May 7, 2007. The difference in the effective tax rate for the periods ended February 2, 2008, January 31, 2009 and fiscal 2009 and the United States federal statutory rate of 35% is primarily attributable to the our status as a partnership for federal income tax purposes.

Refinancing of Term C Loans. On March 5, 2010. Express, LLC and Express Finance Corp., as co-issuers, issued, in a private placement, $250.0 million of 8 ³/4% Senior Notes due March 1, 2018 at an offering price of 98.599% of the face value of the Senior Notes. Interest on the Senior Notes is payable on March 1 and September 1 of each year. A portion of the proceeds from the issuance of the Senior Notes was used to prepay all of the 14.5% Term C Loans under the Topco credit facility, plus accrued and unpaid interest and prepayment penalties, in an aggregate amount equal to approximately $154.9 million.

Basis of Presentation and Results of Operations

The following discussion contains references to years 2007, 2008 and 2009, which represent our fiscal years ended February 2, 2008, January 31, 2009 and January 30, 2010, respectively. Our fiscal year ends each year on the Saturday closest to January 31. Fiscal years 2008 and 2007 were fifty-two week accounting periods. Our business was acquired by investment funds managed by Golden Gate on July 6, 2007 and, as such, we have Predecessor and Successor periods in fiscal 2007. The twenty-two week Predecessor period is from February 4, 2007 through July 6, 2007 and is referred to as our “2007 Predecessor period,” and the thirty week Successor period is from July 7, 2007 through February 2, 2008 and is referred to as our “2007 Successor period.”

Due to the Golden Gate Acquisition, the financial statements for all Successor periods are not comparable to that of the Predecessor periods presented in the accompanying table. Prior to the Golden Gate Acquisition, our consolidated financial statements were prepared on a carve-out basis from Limited Brands. The carve-out consolidated financial statements include allocations of certain costs of Limited Brands. In the Successor period we no longer incur these charges, but do incur certain expenses as a standalone company for the same functions, including for certain support services provided by Limited Brands under the Limited Brands Transition Services Agreements. See “Certain Relationships and Related Party Transactions.” These allocations were based upon various assumptions and estimates and actual results may differ from these allocations, assumptions and estimates. Accordingly, the carve-out consolidated financial statements may not be a comparable presentation of our financial position or results of operations as if we had operated as a standalone entity during the Predecessor periods.

 

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Prior to our registration statement being declared effective, (1) EIC, the holding company that holds 67.3% of the equity interests in us on behalf of certain investment funds managed by Golden Gate and (2) the Management Holding Companies that directly or indirectly hold 6.1% of the equity interests in us on behalf of certain members of management, will be merged with and into us. In connection with our conversion to a corporation and these mergers, Golden Gate (indirectly through a limited liability company) and certain members of our management will receive, in exchange for their equity interests in the entities being merged, the number of shares of our common stock that they would have held had they held these equity interests in us directly. EIC does not have any independent operations or any significant assets or liabilities and does not comprise a business. Accordingly, this legal merger represents in substance a reorganization and transfer of EIC’s income tax receivables or payables between entities under common control. Accordingly, for financial reporting purposes, the transaction will be reflected as a contribution of certain of EIC’s income tax payables or receivables to us, in exchange for a net receivable or payable of equal amount with an affiliate of Golden Gate.

The summary unaudited pro forma condensed consolidated financial data for the fiscal year ended February 2, 2008 presented in the table below has been prepared to give effect to the Golden Gate Acquisition as if such transaction had occurred on February 4, 2007. We have presented in the accompanying discussions of our results, comparisons of fiscal 2009 to fiscal 2008 and fiscal 2008 to our 2007 Successor period and pro forma fiscal 2007 results. We believe that presenting the discussion and analysis of the results of operations in this manner promotes the overall usefulness of the comparison given the complexities involved with comparing two significantly different periods. The information contained in the table below should be read in conjunction with our consolidated financial statements and the related notes included elsewhere in this prospectus.

 

		Predecessor					Successor				Pro Forma				Successor
		Period from February 4, 2007 through July 6, 2007					Period from July 7, 2007 through February 2, 2008				Year Ended
											February 2, 2008				January 31, 2009				January 30, 2010
											(unaudited)
		(dollars in thousands)
Statement of Operations Data:
Net sales		$	659,019				$	1,137,327			$	1,796,346			$	1,737,010			$	1,721,066
Cost of goods sold, buying and occupancy costs			451,514					890,063				1,352,056				1,280,018				1,175,088
Gross profit			207,505					247,264				444,290				456,992				545,978
General, administrative, and store operating expenses			170,100					275,150				447,352				447,071				409,198
Other operating expense, net			302					5,526				7,488				6,007				9,943
Operating income (loss)			37,103					(33,412	)			(10,550	)			3,914				126,837
Interest expense			—					6,978				12,064				36,531				53,222
Interest income			—					(5,190	)			(5,190	)			(3,527	)			(484	)
Other expense (income), net			—					4,712				4,712				(300	)			(2,444	)
Income (loss) before income taxes			37,103					(39,912	)			(22,136	)			(28,790	)			76,543
Provision for income taxes			7,161					487				1,583				246				1,236
Net income (loss)		$	29,942				$	(40,399	)		$	(23,719	)		$	(29,036	)		$	75,307

 

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The following table sets forth, for the periods presented, our consolidated statements of operations as a percentage of total revenues.

 

		Predecessor					Successor			Pro Forma			Successor
		Period from February 4, 2007 through July 6, 2007					Period from July 7, 2007 through February 2, 2008			Year Ended
										February 2, 2008			January 31, 2009			January 30, 2010
										(unaudited)
Statement of Operations Data:
Net sales		100.0	%				100.0	%		100.0	%		100.0	%		100.0	%
Cost of goods sold, buying and occupancy costs		68.5	%				78.3	%		75.3	%		73.7	%		68.3	%
Gross profit		31.5	%				21.7	%		24.7	%		26.3	%		31.7	%
General, administrative, and store operating expenses		25.8	%				24.2	%		24.9	%		25.7	%		23.8	%
Other operating expense, net		0.0	%				0.5	%		0.4	%		0.3	%		0.6	%
Operating income (loss)		5.6	%				(2.9	)%		(0.6	)%		0.2	%		7.4	%
Interest expense		—					0.6	%		0.7	%		2.1	%		3.1	%
Interest income		—					(0.5	)%		(0.3	)%		(0.2	)%		(0.0	)%
Other expense (income), net		—					0.4	%		0.3	%		(0.0	)%		(0.2	)%
Income (loss) before income taxes		5.6	%				(3.5	)%		(1.2	)%		(1.7	)%		4.5	%
Provision for income taxes		1.1	%				0.0	%		0.1	%		0.0	%		0.1	%
Net income (loss)		4.5	%				(3.6	)%		(1.3	)%		(1.7	)%		4.4	%

Unaudited Pro Forma Condensed Consolidated Financial Information

The supplemental unaudited pro forma condensed consolidated statements of operations data set forth below for pro forma 2007 has been derived by applying pro forma adjustments to our historical consolidated statements of operations. We were acquired by investment funds managed by Golden Gate on July 6, 2007. The accompanying unaudited pro forma condensed consolidated financial information is presented for the Predecessor and Successor periods, respectively. As a result of the Golden Gate Acquisition, we applied purchase accounting standards and a new basis of accounting effective July 7, 2007. The unaudited pro forma condensed consolidated statements of operations for the year ended February 2, 2008 gives effect to the Golden Gate Acquisition as if it had occurred on February 4, 2007. Assumptions underlying the pro forma adjustments are described in the accompanying notes, which should be read in conjunction with this unaudited pro forma condensed consolidated financial information.

 

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The unaudited pro forma adjustments are based upon available information and certain assumptions that we believe are reasonable under the circumstances. The unaudited pro forma condensed consolidated financial information is presented for supplemental informational purposes only. The unaudited pro forma condensed consolidated financial information does not purport to represent what our results of operations would have been had the Golden Gate Acquisition and related transactions actually occurred on the date indicated, and they do not purport to project our results of operations or financial condition for any future period. The unaudited pro forma condensed consolidated statements of operations should be read in conjunction with other sections of this “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as well as “Selected Historical Consolidated Financial and Operating Data” and our audited consolidated financial statements and related notes thereto appearing elsewhere in this prospectus.

 

		Predecessor			Successor				Total Adjustments						Pro Forma
		Period from February 4, 2007 through July 6, 2007			Period From July 7, 2007 through February 2, 2008										Year Ended February 2, 2008
															(unaudited)
		(dollars in thousands)
Net sales		$	659,019		$	1,137,327			$	—					$	1,796,346
Cost of goods sold, buying and occupancy costs			451,514			890,063				10,479			(a) (b) (c) (d)			1,352,056
Gross profit			207,505			247,264				(10,479	)					444,290
General, administrative, and store operating expenses			170,100			275,150				2,102			(c)			447,352
Other operating expense, net			302			5,526				1,660			(e)			7,488
Operating income (loss)			37,103			(33,412	)			(14,241	)					(10,550)
Interest expense			—			6,978				5,086			(f)			12,064
Interest income			—			(5,190	)			—						(5,190	)
Other expense, net			—			4,712				—						4,712
Income (loss) before income taxes			37,103			(39,912	)			(19,327	)					(22,136)
Provision for income taxes			7,161			487				(6,065	)		(g)			1,583
Net income (loss)		$	29,942		$	(40,399	)		$	(13,262	)				$	(23,719)

 

(a)

As a result of the Golden Gate Acquisition, we recorded intangible assets at fair value, including a credit card relationship, our customer list and certain favorable lease obligations based on purchase accounting standards at a total amount of $24.5 million. These assets amortize over varying periods and the pro forma financials have been adjusted to reflect these costs over the full fiscal year.

(b)

As a result of the Golden Gate Acquisition, we adjusted property and equipment to reflect a fair value increase equal to $38.5 million. These assets depreciate over various periods greater than two years and the pro forma financials have been adjusted to reflect this additional depreciation expense over the full fiscal year.

(c)

In connection with the Golden Gate Acquisition, we entered into a transition services agreement with Limited Brands to provide ongoing services at an agreed upon rate which includes a margin on Limited Brands’ cost to provide the services. See “Certain Relationships and Related Party Transactions.” Prior to the Golden Gate Acquisition, we were billed for these services at cost. The pro forma financials have been adjusted to reflect this change as if we had entered into the transition services agreement on February 4, 2007.

(d)

We have leases that contain pre-determined fixed escalations of minimum rents. The related rent expense is recognized on a straight-line basis. The pro forma financials have been adjusted to reflect an effective straight-line reset date of February 4, 2007.

(e)

In connection with the Golden Gate Acquisition, we entered into an Advisory Agreement with Golden Gate to provide services to us in exchange for an annual advisory fee. Under the terms of our limited liability company agreement, Limited Brands is also paid a fee calculated as a percentage of the Golden Gate advisory fee. See “Certain Relationships and Related Party Transactions.” The pro forma financials have been adjusted to reflect this fee for the full fiscal year.

(f)

In connection with the Golden Gate Acquisition, on July 6, 2007, the company entered into the $125.0 million Opco term loan and the $200.0 million Opco revolving credit facility. The pro forma financials have been adjusted to reflect the interest expense, scheduled amortization of principal, and amortization of debt financing costs related to the borrowings as if we had entered into the Opco revolving credit facility and the Opco term loan on February 4, 2007. See “—Existing Credit Facilities.”

(g)

For the Predecessor periods, we operated as a division of Limited Brands and recorded a tax provision based on a separate-return methodology. For the period from May 6 through July 6, 2007 and subsequent to the Golden Gate Acquisition, we were treated as a partnership for tax purposes and therefore did not record a provision for income taxes. The pro forma financials have been adjusted to reflect our tax status as a partnership for the full fiscal year.

 

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Fiscal 2009 Compared to Fiscal 2008

Net sales

Net sales were $1,721.1 million in fiscal 2009, a decrease of $15.9 million, or 0.9%, compared to $1,737.0 million in fiscal 2008. We had 573 and 581 stores open at the end of fiscal 2009 and fiscal 2008, respectively. During fiscal 2009, we opened seven new stores, closed six non-productive stores and converted the women’s and men’s stores in nine malls to single dual-gender stores. Net sales per gross square foot were $321 in fiscal 2009 compared to $337 in fiscal 2008. Comparable store sales declined 6%, or $98.1 million, in fiscal 2009 as a result of a decrease in transactions, due primarily to the decline in general economic conditions, which was partially offset by an increase in the average dollars spent per transaction. Comparable store sales performance improved from each quarter to the next during fiscal 2009 in comparison to the same quarter in fiscal 2008 with the first quarter down 16%, or $67.3 million, second quarter down 12%, or $44.9 million, third quarter down 1%, or $3.8 million, and fourth quarter up 4%, or $17.9 million. Fiscal 2009 represented our first full fiscal year of e-commerce sales, which generated net sales of $92.2 million in fiscal 2009, an increase of $64.4 million compared to fiscal 2008, primarily as a result of increases in traffic to our website since its launch in July 2008, and the fact that the website was only operational for part of fiscal 2008. Other revenue was $12.2 million in fiscal 2009, an increase of $7.4 million, compared to other revenue of $4.8 million in fiscal 2008 primarily as a result of shipping and handling revenue related to the increase in e-commerce net sales.

Gross profit

Gross profit was $546.0 million, or 31.7% of net sales, in fiscal 2009, an increase of $89.0 million, or 19.5%, compared to $457.0 million, or 26.3% of net sales, in fiscal 2008. Gross profit was impacted by purchase accounting related to the Golden Gate Acquisition which had the effect of increasing the carrying amount of property and equipment by $38.5 million which is being depreciated over the remaining useful life of each asset and recording an intangible asset of $19.8 million related to net favorable lease obligations that is being amortized over the remaining life of each lease.

The improvement in gross profit was due primarily to a $76.5 million increase resulting from our redesigned go-to-market strategy which we believe reduces markdowns and lowers inventory risk through increased product testing. This increase was realized through higher revenue margin (product price plus other revenue less product cost), a reduction in distressed carry-over inventory at the end of fiscal 2009 and lower product cancellation expense. The remaining increase in gross margin was driven primarily by a $5.3 million reduction in freight and a $1.4 million reduction in home office headquarters buying expense. The impact of purchase accounting had the effect of reducing gross profit by $11.8 million and $19.5 million for fiscal 2009 and fiscal 2008, respectively.

General, administrative, and store operating expenses

General, administrative, and store operating expenses were $409.2 million, or 23.8% of net sales, for fiscal 2009, a decrease of $37.9 million, or 8.5%, compared to $447.1 million, or 25.7% of net sales, for fiscal 2008. The decline in general, administrative, and store operating expenses was due primarily to a $35.3 million reduction in store expenses resulting from efforts to optimize payroll and increase operational efficiencies, and a $2.2 million savings in benefits and payroll administration related to our transition to a standalone business. These reductions were partially offset by a $1.7 million investment in home office headcount to support our e-commerce growth strategy.

Other operating expense, net

Other operating expense, net was $9.9 million in fiscal 2009, an increase of $3.9 million, or 65.5%, compared to $6.0 million in fiscal 2008. Changes in other operating expense, net relate primarily to changes in advisory fees which are calculated as a percent of Adjusted EBITDA.

 

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Interest expense

Interest expense was $53.2 million in fiscal 2009, an increase of $16.7 million, or 45.6%, compared to $36.5 million in fiscal 2008. This increase resulted primarily from our entering into the $300.0 million Topco credit facility on June 26, 2008, and therefore interest expense for fiscal 2008 only reflects thirty-one weeks of interest relating to this facility. This was offset by lower interest expense of $3.0 million related to our Opco term loan, which had a lower interest rate during fiscal 2009 and accrued interest on a lower outstanding principal balance.

Interest income

Interest income was $0.5 million for fiscal 2009, a decrease of $3.0 million, as compared to $3.5 million for fiscal 2008. The decrease in interest income resulted primarily from a reduction in interest rates on investments in overnight treasury securities.

Other expense (income), net

Other income was $2.4 million for fiscal 2009, an increase of $2.1 million, as compared to $0.3 million for fiscal 2008. Other (expense) income, net was primarily composed of changes in the fair market value of our interest rate swap.

Provision for income taxes

Provision for income taxes was $1.2 million for fiscal 2009, an increase of $1.0 million, as compared to $0.2 million for fiscal 2008. See “—Other Factors Affecting Our Results” for additional information related to our tax structure.

Fiscal 2008 Compared to Pro Forma 2007 and the 2007 Successor period

Net sales

Net sales were $1,737.0 million in fiscal 2008, a decrease of $59.3 million, or 3.3%, compared to $1,796.3 million for pro forma fiscal 2007, and were $1,137.3 million in the 2007 Successor period. We had 581 and 587 stores open at the end of fiscal 2008 and fiscal 2007, respectively. During fiscal 2008, we opened nine new stores, closed nine non-productive stores and converted the women’s and men’s stores in six malls to single dual-gender stores. Fiscal 2008 net sales increased $599.7 million compared to the 2007 Successor period primarily due to the comparison of a fifty-two week period in 2008 to a thirty-week period in 2007. Net sales per gross square foot were $337 in fiscal 2008 compared to $213 in the 2007 Successor period. The increase in sales per gross square foot primarily resulted from the inclusion of an additional twenty-two weeks of net sales in the fiscal 2008 period. Comparable store sales during the same thirty-week period in 2008 were down 10%, or $109.9 million, compared to the 2007 Successor period due primarily to a decline in transaction volumes resulting from an overall decline in consumer spending late in the third quarter and throughout the fourth quarter in 2008. Net sales generated through e-commerce were $27.8 million in fiscal 2008, which represents sales from our website launch in July 2008 through the fiscal year end. Other revenue for fiscal 2008 was $4.8 million and was related primarily to shipping and handling revenue on e-commerce sales.

Net sales per gross square foot were $337 in fiscal 2008, up $8, or 2.4%, compared to $329 in pro forma 2007. Comparable store sales declined by 3%, or $42.4 million, in fiscal 2008 compared to pro forma fiscal 2007, due primarily to a decrease in transaction volumes resulting from an overall decline in consumer spending, late in the third quarter and throughout the fourth quarter of 2008. This resulted in comparable store sales declines of 4%, or $17.5 million, in third quarter and 17%, or $93.3 million, in fourth quarter 2008. This decrease was partially offset by an increase in the first and second quarter comparable store sales which were up 13%, or $46.2 million, and 6%, or $22.2 million, respectively, due to an increased number of transactions.

 

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Gross profit

Gross profit was $457.0 million, or 26.3% of net sales for fiscal 2008, an increase of $12.7 million, or 2.9%, compared to $444.3 million, or 24.7% of net sales for pro forma fiscal 2007. For the 2007 Successor period, gross profit was $247.3 million, or 21.7% of net sales. Gross profit was impacted by purchase accounting related to the Golden Gate Acquisition, which increased the carrying amount of inventories by $86.9 million during 2007, increased property and equipment by $38.5 million, which is being depreciated over the remaining useful life of each asset, and recorded an intangible asset of $19.8 million related to net favorable lease obligations that is being amortized over the remaining life of each lease. The entire impact of the $86.9 million purchase accounting inventory adjustment was reflected in gross profit for pro forma fiscal 2007 and the 2007 Successor period, while the property and equipment and intangible adjustments impacted fiscal 2008, pro forma fiscal 2007 and the 2007 Successor period by $19.5 million, $20.9 million, and $14.0 million respectively.

The $209.7 million increase in gross profit for fiscal 2008 compared to the 2007 Successor period primarily resulted from the comparison of a fifty-two week period in 2008 to a thirty-week period in 2007. A portion of the increase in fiscal 2008 compared to the 2007 Successor period was driven by the $86.9 million inventory related purchase accounting adjustment that reduced gross profit during the 2007 Successor period. Revenue margin was negatively impacted in fiscal 2008 due to the proportionately higher markdowns on excess inventory during late third quarter and all of fourth quarter, primarily driven by the challenging economic environment. For the comparable thirty-week period in 2008, revenue margin decreased $101.4 million compared to the 2007 Successor period.

The $12.7 million improvement in gross profit for fiscal 2008 compared to pro forma 2007 was driven primarily by the $86.9 million inventory related purchase accounting adjustment that reduced gross profit in pro forma 2007. Gross profit was negatively impacted by a decrease in consumer spending on discretionary items during the recessionary period in fiscal 2008 which contributed to a $59.4 million decline in revenue margin, a $9.8 million increase in product cancellation expense, and a $6.2 million increase in shrink related expense.

General, administrative, and store operating expenses

General, administrative, and store operating expenses were $447.1 million, or 25.7% of net sales, for fiscal 2008, a decrease of $0.3 million, or 0.1%, compared to $447.4 million, or 24.9% of net sales, for pro forma fiscal 2007. For the 2007 Successor period, general, administrative, and store operating expenses were $275.2 million, or 24.2% of net sales.

The $171.9 million increase in general, administrative, and store operating expenses in fiscal 2008 compared to the 2007 Successor period primarily resulted from the comparison of a fifty-two week period in 2008 to a thirty-week period in 2007. For the comparable thirty-week period in 2008, general, administrative, and store operating expenses were down $21.6 million due primarily to a $30.8 million decrease related to efforts to optimize store payroll and increase operational efficiencies in store expense, offset by a $5.4 million increase in home office headquarters expense related to a re-investment in our merchant and design organization, investments to support our e-commerce growth strategy and an $8.6 million investment in marketing campaigns and programs.

The $0.3 million decline in general, administrative, and store operating expenses in fiscal 2008 compared to pro forma 2007 was driven by a $30.3 million reduction in store expenses driven by efforts to optimize store payroll and increase operational efficiencies, offset by a $14.4 million increase in home office headquarters expense related to a re-investment in our merchant and design organization, investments to support our e-commerce growth strategy and a $12.4 million investment in marketing campaigns and programs.

 

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Other operating expense, net

Other operating expense, net was $6.0 million in fiscal 2008, a decrease of $1.5 million, or 19.8%, compared to $7.5 million in pro forma 2007 and $5.5 million in the 2007 Successor period. Changes in other operating expense, net relate primarily to changes in advisory fees which are calculated as a percent of Adjusted EBITDA.

Interest expense

Interest expense was $36.5 million in fiscal 2008, an increase of $24.5 million, or 203%, compared to $12.1 million in pro forma fiscal 2007 and was $7.0 million in the 2007 Successor period. This increase resulted primarily from our entering into the $300.0 million Topco credit facility on June 26, 2008. This increase was offset slightly by lower interest expense related to our Opco term loan which had a lower interest rate during fiscal 2008 and accrued interest on a lower outstanding principal balance.

Interest income

Interest income was $3.5 million in fiscal 2008, a decrease of $1.7 million, or 32.0%, compared to $5.2 million in pro forma fiscal 2007 and was $5.2 million in the 2007 Successor period. The decrease in interest income during fiscal 2008 was due primarily to a reduction in interest rates on investments in overnight treasury securities and a decline in the average amount of cash and cash equivalents on hand.

Other expense (income), net

Other income was $0.3 million in fiscal 2008, compared to expense of $4.7 million in pro forma fiscal 2007 and expense of $4.7 million in the 2007 Successor period. Other income (expense), net is primarily composed of changes in the fair market value of our interest rate swap and the proceeds from the settlement of insurance claims. Other expense in pro forma 2007 and the 2007 Successor period was due primarily to an increase in liability related to our interest rate swap.

Provision for income taxes

Provision for income taxes was $0.2 million in fiscal 2008 compared to $1.6 million in pro forma fiscal 2007 and $0.5 million in the 2007 Successor period. See the discussion above in “—Other Factors Affecting Our Results” for additional information related to our tax structure.

Quarterly Results and Seasonality

The following table sets forth our historical unaudited quarterly consolidated statements of income for each of the last eight fiscal quarters ended January 30, 2010. This unaudited quarterly information has been prepared on the same basis as our annual audited financial statements appearing elsewhere in this prospectus, and includes all adjustments, consisting only of normal recurring adjustments, that we consider necessary to present fairly the financial information for the fiscal quarters presented.

Our business is seasonal and, historically, we have realized a higher portion of our net sales and net income in the third and fourth fiscal quarters due primarily to early Fall selling patterns as well as the impact of the holiday season. Generally, the annual sales split is 45% for the Spring season (February through July) and 55% for the Fall season (August through January). Working capital requirements are typically higher in the second and fourth quarters due to inventory-related working capital requirements for holiday and early Fall selling periods. Our business is also subject, at certain times, to calendar shifts, which may occur during key selling periods close to holidays such as Easter, Thanksgiving, and Christmas and regional fluctuations for events such as sales tax holidays. As such, results of a period shorter than a full year may not be indicative of results expected for the entire year. Furthermore, the seasonal nature of our business may affect comparisons between periods.

 

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The quarterly data should be read in conjunction with our audited consolidated financial statements and the related notes appearing elsewhere in this prospectus.

Quarterly Results of Operations

 

		Fiscal 2008																Fiscal 2009
		First Quarter				Second Quarter				Third Quarter				Fourth Quarter				First Quarter				Second Quarter				Third Quarter				Fourth Quarter
		(unaudited)
		(dollars in thousands)
Net sales		$	422,696			$	399,066			$	409,882			$	505,366			$	374,358			$	373,823			$	426,046			$	546,839
Cost of goods sold, buying and occupancy costs			289,461				285,729				295,118				409,710				262,274				271,024				280,700				361,090
Gross profit			133,235				113,337				114,764				95,656				112,084				102,799				145,346				185,749
General, administrative, and store operating expenses			116,471				111,420				112,306				106,874				89,524				94,716				101,019				123,939
Other operating expense, net			3,768				1,282				17				940				1,617				1,827				3,070				3,429
Operating income (loss)			12,996				635				2,441				(12,158	)			20,943				6,256				41,257				58,381
Interest expense			2,737				6,029				13,625				14,140				13,649				13,198				13,357				13,018
Interest income			(2,131	)			(870	)			(400	)			(126	)			(76	)			(98	)			(229	)			(81	)
Other (income) expense, net			(1,155	)			(576	)			615				816				(443	)			(467	)			(668	)			(866	)
Income (loss) before income taxes			13,545				(3,948	)			(11,399	)			(26,988	)			7,813				(6,377	)			28,797				46,310
Provisions for income taxes			199				(76	)			(37	)			160				214				379				330				313
Net income (loss)		$	13,346			$	(3,872	)		$	(11,362	)		$	(27,148	)		$	7,599			$	(6,756	)		$	28,467			$	45,997
Adjusted EBITDA		$	53,949			$	25,557			$	31,973			$	25,719			$	45,150			$	33,564			$	66,415			$	84,621
Comparable store sales(1)			13	%			6	%			(4	)%			(17	)%			(16	)%			(12	)%			(1	)%			4	%

 

(1)

Comparable store sales have been calculated based upon stores that were open at least thirteen full fiscal months as of the end of the reporting period.

The following table presents a reconciliation of the differences between EBITDA and Adjusted EBITDA to net income, the most directly comparable GAAP financial measure, for the periods indicated below. See note 4 to the table included in “Summary Historical and Pro Forma Consolidated Financial and Operating Data.”

 

		Fiscal 2008															Fiscal 2009
		First Quarter			Second Quarter				Third Quarter				Fourth Quarter				First Quarter			Second Quarter				Third Quarter				Fourth Quarter
		(unaudited)
		(dollars in thousands)
Net income (loss)		$	13,346		$	(3,872	)		$	(11,362	)		$	(27,148	)		$	7,599		$	(6,756	)		$	28,467			$	45,997
Depreciation and amortization			19,376			19,458				19,752				20,519				18,796			18,356				16,318				16,198
Interest expense, net			607			5,350				13,226				14,016				13,573			13,099				13,127				12,939
Provision for income taxes			199			(76	)			(37	)			160				214			379				330				313
EBITDA			33,528			20,860				21,579				7,547				40,182			25,078				58,242				75,447
Non-cash deductions, losses, charges			2,254			1,101				6,261				11,496				922			3,647				4,225				3,334
Non-recurring expenses			13,926			386				1,148				3,200				1,100			1,580				1,127				2,101
Transaction expenses			567			1,103				826				1,100				674			533				236				213
Permitted Advisory Agreement fees and expenses			1,716			1,320				(29	)			1,231				1,193			1,253				2,279				2,428
Non-cash expense related to equity incentives			499			532				503				535				503			501				506				542
Other adjustments allowable under our existing credit agreements			1,459			255				1,685				610				576			972				(200	)			556
Adjusted EBITDA		$	53,949		$	25,557			$	31,973			$	25,719			$	45,150		$	33,564			$	66,415			$	84,621

 

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Liquidity and Capital Resources

General

Our business relies on cash flows from operations as our primary source of liquidity. We do, however, have access to additional liquidity, if needed, through borrowings under our existing Opco revolving credit facility. Our primary cash needs are for merchandise inventories, payroll, store rent, capital expenditures associated with opening new stores and updating existing stores and information technology. The most significant components of our working capital are cash and cash equivalents, merchandise inventories, accounts payable and other current liabilities. Our working capital 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 a few days of the related sale, and we have up to 75 days to pay merchandise vendors and 45 days to pay non-merchandise vendors. We used a portion of the proceeds of our Senior Notes offering, together with cash on hand of $153.8 million, to make a distribution to our equity holders of $230.0 million. Following this distribution, as of April 3, 2010, we had cash and cash equivalents of approximately $56.7 million and $139.6 million of availability under the Opco revolving credit facility. Our working capital is seasonal as a result of our building up of inventory for the next selling season, and as a result our cash and cash equivalents during the spring are usually lower when compared to the rest of our fiscal year. Our cash balances generally increase during the summer selling season, and then increase further during the fall and holiday seasons. As our cash balances and inventory increase during the summer, fall and holiday seasons, our borrowing base under our revolving credit facility increases. We believe that cash generated from operations and the availability of borrowings under our credit facilities or other financing arrangements will be sufficient to meet working capital requirements, anticipated capital expenditures and scheduled debt payments for at least the next twelve months.

Cash Flow Analysis

A summary of operating, investing, and financing activities are shown in the following table:

 

		Predecessor						Successor
		Period from February  4, 2007 through July 6, 2007						Period from July  7, 2007 through February 2, 2008
												Year Ended
												January 31, 2009				January 30, 2010
								(dollars in thousands)
Provided by operating activities		$	45,912					$	282,192			$	35,234			$	200,721
Used in investing activities			(22,888	)					(15,258	)			(51,801	)			(26,873	)
(Used in) provided by financing activities			(29,939	)					39,361				(127,347	)			(115,559	)
(Decrease) increase in cash and cash equivalents			(6,915	)					306,295				(143,914	)			58,289
Cash and cash equivalents at end of period		$	13,734					$	320,029			$	176,115			$	234,404

Net Cash Provided By Operating Activities

Operating activities consist primarily of net income adjusted for non-cash items, including depreciation and amortization, the effect of working capital changes, and tenant allowances received from landlords.

Net cash provided by operating activities was $200.7 million for fiscal 2009 compared to $35.2 million in fiscal 2008. The $165.5 million increase in cash provided by operating activities was due primarily to a $104.3 million increase in net income, a $21.6 million source of cash related to the change in accounts payable, deferred revenue, and accrued expenses and a $44.1 million source of cash related to the change in accounts payable and accrued expenses—related parties.

Net cash provided by operating activities was $35.2 million for fiscal year 2008 compared to $282.2 million in the 2007 Successor period. The cash provided by operating activities in the 2007 successor period was impacted by our transition to a standalone company and establishing working capital accounts with our third

 

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party vendors. The $247.0 million decrease in cash provided by operating activities was due primarily to a $59.9 million use of cash related to inventory and accounts payable and accrued expenses for related parties in fiscal 2008 compared to a $230.6 million source of cash during the 2007 Successor period. These decreases in cash were partially offset by a $11.4 million increase in net income and a $32.2 million increase in depreciation and amortization expense. Both of these decreases are primarily the result of the comparison of fiscal 2008 to a partial year period in 2007.

Net Cash Used in Investing Activities

Investing activities consist primarily of capital expenditures for growth (new store openings), store maintenance (remodels, conversions to a dual gender format, visual, fixtures, heating, ventilation and air conditioning improvements and gates), and non-store maintenance (information technology and expenses associated with operations at our headquarters).

Capital expenditures were $26.9 million in fiscal 2009, $50.6 million in fiscal 2008, $15.3 million in the 2007 Successor period and $22.9 million in the 2007 Predecessor period. Capital expenditures, gross of landlord allowances, for the opening of new stores, store remodels, and store conversions to a dual gender format were $14.4 million in fiscal 2009, $29.5 million in fiscal 2008, $14.9 million for the 2007 Successor period and $17.2 million in the 2007 Predecessor period. In fiscal 2009, $10.2 million was spent on investments in information technology primarily related to our transition to a standalone business. The remaining capital expenditures in each period relates primarily to investments in store fixtures, heating, ventilation and air conditioning improvements, gates, information technology and investments in the operations at our headquarters.

Management expects capital expenditures for fiscal 2010 to be approximately $57 to $63 million, including landlord allowances, with the increase compared to fiscal 2009 resulting primarily from new store openings and the final phase of our information technology transition which relates primarily to point-of-sale and customer marketing database investments. Landlord allowances related to fiscal 2010 capital expenditures are expected to be approximately $7 to $10 million.

Net Cash (Used in) Provided By Financing Activities

Financing activities consist primarily of borrowings and repayments related to the Opco term loan, the Topco credit facility and our Opco revolving credit facility, as well as distributions to our equity holders and fees and expenses paid in connection with our credit facilities.

Net cash used by financing activities was $115.6 million in fiscal 2009. This use of cash included $75.0 million of repayments of borrowings under our Opco revolving credit facility, $7.1 million of repayments of borrowings under our Opco term loan and Topco credit facility and a $33.0 million distribution to equity holders.

Net cash used by financing activities was $127.3 million for fiscal 2008. This reflected a source of cash related to borrowings of $294.0 million under the Topco credit facility and $75.0 million in borrowings under our Opco revolving credit facility, offset by a distribution to equity holders of $491.2 million as well as $3.9 million in expenses paid in connection with the Topco credit facility, and $1.3 million in repayments related to the Opco term loan. This compares to $39.4 million in net cash provided by financing activities for the 2007 Successor period. This source of cash was primarily from cash equity contributions by our equity holders.

Net cash used by financing activities was $29.9 million for the 2007 Predecessor period. These declines resulted from lower net cash investments in the business by Limited Brands during each respective period.

 

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Existing Credit Facilities

Opco Revolving Credit Facility

On July 6, 2007, Express Holding and Express, LLC entered into a $200.0 million secured Asset-Based Loan Credit Agreement. The Opco revolving credit facility is available to be used for working capital and other general corporate purposes and is scheduled to expire on July 6, 2012. The Opco revolving credit facility, as amended, allows for swing line advances of up to $30.0 million and up to $45.0 million to be available in the form of letters of credit.

On February 5, 2010, Express Holding and Express, LLC entered into an amendment to the Opco revolving credit facility that became effective March 5, 2010 in connection with the 2010 Refinancing Transactions. The amendment, among other things, (1) permitted the issuance of the Senior Notes and the guarantees thereof by Express Holding and its subsidiaries, (2) increased the applicable interest rate margins and unused line fee, (3) permitted a distribution by Express, LLC to allow Express Topco to prepay the Term C Loans under the Topco credit facility in their entirety (plus prepayment penalties and accrued and unpaid interest thereon) and Express Parent to make a cash distribution to its equity holders in an aggregate amount equal to approximately $230.0 million, (4) permits Express, LLC to pay distributions to allow Express Topco to make regularly scheduled interest payments on the Term B Loans under the Topco credit facility and (5) permits Express Holding to own the equity interests of Express Finance Corp., the co-issuer of the Senior Notes. We paid customary amendment fees to consenting lenders in connection with the amendment.

Borrowings under the Opco revolving credit facility bear interest at a rate equal to LIBOR plus an applicable margin rate or the higher of The Wall Street Journal’s prime lending rate and 0.50% per annum above the federal funds rate, plus an applicable margin rate. The applicable margin rate is determined based on excess availability as determined with reference to our borrowing base. Prior to the effectiveness of the amendment described above, the applicable margin rate for LIBOR-based advances was 1.25% per annum or 1.00% if excess availability was $100.0 million or greater, and for base rate-based advances was 0.25% per annum or 0.00% if excess availability was $100.0 million or greater. As a result of the amendment described above, effective March 5, 2010, the applicable margin rate for LIBOR-based advances is 2.25% per annum or 2.00% if excess availability is $100.0 million or greater, and for base rate-based advances is 1.25% per annum or 1.00% if excess availability is $100.0 million or greater. The borrowing base components are 90% of credit card receivables plus 85% of the liquidation value of eligible inventory, less certain reserves. At the end of fiscal 2008, we borrowed $75.0 million under the Opco revolving credit facility, which was reflected as a current liability on our balance sheet. This amount was paid in full during the first quarter of fiscal 2009. We had no borrowings outstanding and $139.6 million available under the Opco revolving credit facility as of April 3, 2010.

Prior to the effectiveness of the amendment described above, unused line fees payable under the Opco revolving credit facility were based on 0.25% of the average daily unused revolving commitment during each quarter payable quarterly in arrears. As a result of the amendment described below, effective March 5, 2010, unused line fees payable under the Opco revolving credit facility are based on 0.50% of the average daily unused revolving commitment during each quarter payable quarterly in arrears.

Interest payments under the Opco revolving credit facility are due quarterly on the last day of each April, July, October and January for base rate-based advances and on the last day of the interest period for LIBOR-based advances for interest periods of one, two, three and six months (or if available to all lenders, nine or twelve months), and additionally every three months after the first day of the interest period for LIBOR-based advances for interest periods of greater than three months.

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

 

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the nature of our business or our fiscal year; the ability to amend the terms of the Opco term loan and the Advisory Agreement; and permitted activities of Express Holding. All obligations under the Opco revolving credit facility are guaranteed by Express Holding and its subsidiaries and secured by a lien on substantially all of the assets of Express Holding and its subsidiaries; provided that the liens on certain assets of Express Holding and its subsidiaries shall be junior in priority to the liens securing the Opco term loan facility.

Prior to the effectiveness of the amendment described above, the Opco revolving credit facility required us to maintain a fixed charge coverage ratio of 1.00 to 1.00 if excess availability plus eligible cash collateral was less than $20.0 million. Our excess availability was $135.2 million as of January 30, 2010. We were not subject to this covenant as of January 30, 2010 because excess availability plus eligible cash collateral was greater than $20.0 million. As a result of the amendment described above, effective March 5, 2010, the Opco revolving credit facility requires Express, LLC to maintain a fixed charge coverage ratio of 1.00 to 1.00 if excess availability plus eligible cash collateral is less than $30.0 million.

Opco Term Loan Facility

On July 6, 2007, Express Holding and Express, LLC, entered into a $125.0 million secured term loan. The proceeds of these borrowings were used to finance, in part, the Golden Gate Acquisition and to pay transaction fees and expenses related to the Golden Gate Acquisition. Borrowings under the Opco term loan bear interest at a rate equal to LIBOR plus an applicable margin rate or the higher of The Wall Street Journal’s prime lending rate and 0.50% per annum above the federal funds rate, plus an applicable margin rate.

On February 5, 2010, Express Holding and Express, LLC entered into an amendment to the Opco term loan that became effective March 5, 2010 in connection with the 2010 Refinancing Transactions. The amendment, among other things, (1) permitted the issuance of the Senior Notes and the guarantees thereof by Express Holding and its subsidiaries, (2) increased the applicable interest rate margins (subject to a further increase in the event Express, LLC’s corporate family rating is not B2 or better by Moody’s and Express, LLC’s corporate credit rating is not B or better by Standard & Poor’s), (3) permitted a distribution by Express, LLC to allow Express Topco to prepay the Term C Loans under the Topco credit facility in their entirety (plus any applicable prepayment penalties and accrued and unpaid interest thereon), and Express Parent to make a cash distribution to its equity holders in an aggregate amount equal to approximately $230.0 million, (4) permits Express, LLC to pay distributions to allow Express Topco to make regularly scheduled interest payments on the Term B Loans under the Topco credit facility and (5) permits Express Holding to own the equity interests of Express Finance Corp., the co-issuer of the Senior Notes. We paid customary fees to consenting lenders in connection with the amendment.

The applicable margin rate is determined by Express Holding’s leverage ratio of consolidated debt for borrowed money (net of cash and cash equivalents provided that, after giving effect to the amendment described below, no more than $75.0 million of cash and cash equivalents may be netted against consolidated debt for borrowed money for this purpose), including amounts drawn under letters of credit and any synthetic debt, to Adjusted EBITDA (“Leverage Ratio”), in effect on the first day of each interest period with respect to LIBOR-based advances and by the Leverage Ratio in effect from time to time with respect to base rate-based advances. Prior to the effectiveness of the amendment described above, the applicable margin rate for LIBOR-based advances was 2.75% per annum or 2.50% if the Leverage Ratio was less than 1.00 to 1.00, and for base rate-based advances was 1.75% per annum or 1.50% if the Leverage Ratio was less than 1.00 to 1.00. As a result of the amendment described above, effective March 5, 2010, the applicable margin rate for LIBOR-based advances is 4.25% per annum or 4.00% if the Leverage Ratio is less than 1.00 to 1.00, and for base rate-based advances is 3.25% per annum or 3.00% if the Leverage Ratio is less than 1.00 to 1.00; additionally, these rates may be further increased by 0.50% per annum in the event that Express, LLC fails to maintain, at the time of determination, a corporate family rating of B2 or better by Moody’s and a corporate credit rating of B or better by Standard & Poor’s. As of February 27, 2010, the interest rate under the Opco term loan was 4.25%.

 

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Interest payments under the Opco term loan are due quarterly on the last day of each April, July, October and January for base rate-based advances and on the last day of the applicable interest period for LIBOR-based advances for interest periods of one, two, three and six months (or if available to all lenders, nine or twelve months), and additionally every three months after the first day of the interest period for LIBOR-based advances for interest periods of greater than three months. Principal payments under the Opco term loan are due quarterly on the last business day of each April, July, October and January through July 6, 2013, in equal installments of 0.25% of the initial principal balance with the balance of principal due on July 6, 2014.

The agreement governing the Opco term loan requires that annual prepayments of principal be made within five business days after the 120th calendar day following the end of each fiscal year in the amount by which an applicable percentage of “excess cash flow” (as defined in the agreement) that corresponds to Express Holding’s Leverage Ratio, exceeds any voluntary prepayments of the Opco term loan over the fiscal year.

The Opco term loan 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 Express, LLC’s businesses or fiscal year; the ability to amend the terms of the purchase agreement pertaining to the Golden Gate Acquisition, the Opco revolving credit facility loan documents and the Advisory Agreement with Golden Gate; and permitted activities of Express Holding. All obligations under the Opco term loan are guaranteed by Express Holding and its subsidiaries and secured by a lien on substantially all of the assets of Express Holding and its subsidiaries; provided that the liens on certain assets of Express Holding and its subsidiaries shall be junior in priority to the liens securing the Opco revolving credit facility.

The Opco term loan also requires that Express Holding maintains a Leverage Ratio for the most recently completed reporting period (last four consecutive fiscal quarters as of the end of each quarter) of not more than 2.25 to 1.00 at the end of the fourth quarter of fiscal year 2009; 2.00 to 1.00 at the end of the first and second fiscal quarters of 2010; and 1.75 to 1.00 thereafter. Express Holding was in compliance with the covenant requirement as of January 30, 2010.

Effective July 6, 2007, Express, LLC entered into a receive variable/pay fixed interest rate swap agreement to mitigate exposure to interest rate fluctuations on a notional principal amount of $75.0 million of the $125.0 million variable-rate Opco term loan. The interest rate swap agreement terminates on August 6, 2010. The fair value of the interest rate swap was a liability of $2.0 million as of January 30, 2010. The Opco term loan requires that Express, LLC maintain interest rate hedge agreements on a notional amount of at least 50% of the term commitments of lenders under the Opco term loan for at least three years.

Topco Credit Facility

On June 26, 2008, Express Topco, as borrower, entered into a $300.0 million secured term loan facility. The proceeds of the Topco credit facility were used to finance distributions to Express Parent’s equity holders and to pay related fees, costs and expenses. The Topco credit facility is scheduled to mature on June 26, 2015 and was comprised of $150.0 million of Term B Loans and $150.0 million of Term C Loans. On March 5, 2010, in connection with the 2010 Refinancing Transactions, all of the Term C Loans were prepaid, plus all prepayment penalties and accrued and unpaid interest thereon. See “Prospectus Summary—Recent Developments.” An affiliate of Golden Gate, GGC Unlevered Credit Opportunities, LLC, is a lender under our Topco credit facility and as of January 30, 2010 was owed approximately $50.0 million of the Term B Loans and $50.0 million of the Term C Loans. A separate affiliate of Golden Gate purchased an additional $8.3 million of principal amount of Term B Loans on April 8, 2010.

On February 5, 2010, Express Topco entered into an amendment to the Topco credit facility that became effective on March 5, 2010 in connection with the 2010 Refinancing Transactions. The amendment, among other things, permitted (1) the issuance of the Senior Notes and the guarantee thereof by Express Topco and each of its

 

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subsidiaries and (2) a distribution by Express Topco to Express Parent to allow Express Parent to make a cash distribution to its equity holders in an aggregate amount equal to approximately $230.0 million. We paid a customary amendment fee to the administrative agent in connection with the amendment.

On April 26, 2010, Express Topco entered into a second amendment to the Topco credit facility. The amendment, among other things, reduced the redemption price in connection with an initial public offering prior to June 26, 2010 to 106%.

The Topco credit facility is not guaranteed by any of Express Topco’s subsidiaries. All obligations under the Topco credit facility are secured by a lien on all outstanding equity interests in Express Holding owned by Express Topco, any distributions, dividends or other property received in respect of or in exchange for such interests and all proceeds of the foregoing.

The Term B Loans bear interest at 13.5% per annum. Interest payments for the Term B Loans are due semi-annually, in cash, on the last day of each January and July, with a final payment due upon the maturity of the Topco credit facility. Term C Loans bore interest at 14.5% per annum. Interest payments for the Term C Loans were due on the last day of each January, April, July and October, with a final payment due upon the maturity of the Topco credit facility. Interest payments on Term C Loans were payable in cash, or upon five business days’ notice to the lenders, could be paid in kind and added to the unpaid principal amount of the Term C Loans. Term C Loans for which interest was paid in kind bore interest at 16.0% per annum for the interest period ending on the applicable payment date. Amounts representing payment in kind interest were treated as and bore interest as Term C Loans under the Topco credit facility. For fiscal 2008 and 2009, Express Topco accumulated $6.2 million of in-kind interest on the Term C Loans which was paid in cash on October 19, 2009 prior to the 2010 Refinancing Transactions.

The Topco credit facility also requires that 100% of the proceeds of the first underwritten public offering of Express Parent’s (or its direct or indirect parent) or any of the subsidiaries’ equity securities, net of customary costs incurred in connection with such offering, be used to prepay loans outstanding under the Topco credit facility at the then-applicable redemption prices applicable to voluntary prepayments of such loans described below.

Voluntary prepayments are permitted in whole or in part, subject to certain minimum prepayment requirements and payment of the applicable premium described below. Prepayments of Term B Loans may be made at the following percentages of the outstanding principal amount prepaid: 107% (106% if in connection with an initial public offering) on or after December 26, 2009, but prior to June 26, 2010; 104% on or after June 26, 2010, but prior to June 26, 2011; 102% on or after December 26, 2011, but prior to June 26, 2012; and 100% on or after June 26, 2012.

The Topco credit facility contains customary covenants and restrictions on Express Topco’s, and in some cases its subsidiaries, activities, including, but not limited to, limitations on the incurrence of additional indebtedness; liens on the equity interests of Express Holding and proceeds thereof and negative pledges on the equity interests of Express Holding securing the Topco credit facility; guarantees, investments, loans, asset sales, mergers, acquisitions and prepayment of other debt; distributions, dividends, the repurchase of equity interests and payments made pursuant to equity incentive and similar plans; transactions with affiliates; the ability to change the nature of our businesses or fiscal year; and the ability of Express Topco to conduct business or hold any properties or liabilities, other than equity interests in Express Holding, indebtedness permitted by the Topco credit facility, and activities incidental thereto.

The Topco credit facility also requires compliance with certain financial covenants. Express Topco must maintain, for the most recently completed reporting period (last four consecutive fiscal quarters as of the end of each quarter), a leverage ratio of consolidated debt for borrowed money (net of cash and cash equivalents), including amounts drawn under letters of credit and any synthetic debt, to Adjusted EBITDA of not more than 5.00 to 1.00.

 

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Express Topco must also maintain for the most recently completed reporting period (last four consecutive fiscal quarters as of the end of each quarter), an interest coverage ratio of not less than 1.50 to 1.00. The interest coverage ratio is determined by the ratio of Adjusted EBITDA to consolidated interest expense. We were in compliance with these covenant requirements as of January 30, 2010.

Senior Notes

On March 5, 2010, Express, LLC and Express Finance Corp., as co-issuers, issued, in a private placement, $250.0 million of 8¾% Senior Notes due March 1, 2018 at an offering price of 98.599% of the face value of the Senior Notes. An affiliate of Golden Gate purchased $50.0 million of Senior Notes in the offering. Interest on the Senior Notes is payable on March 1 and September 1 of each year. A portion of the proceeds from the issuance of the Senior Notes was used to prepay all of the Term C Loans under the Topco credit facility, plus prepayment penalties of $3.0 million and accrued and unpaid interest thereon of $1.9 million. The remaining proceeds, together with cash on hand, were used to make a $230.0 million cash distribution to our equity holders and pay fees and expenses, including discounts and commissions to the initial purchasers of the Senior Notes, of $15.4 million.

Prior to March 1, 2014, the Senior Notes may be redeemed in part or in full at a redemption price equal to 100% of the principal amount of the Senior Notes, plus a make-whole premium calculated in accordance with the indenture governing the Senior Notes and accrued and unpaid interest. In addition, prior to March 1, 2013, a portion of the Senior Notes may be redeemed with the net proceeds of certain equity offerings at 108.75%. We do not intend to use the proceeds of this offering to redeem any of the Senior Notes. See “Use of Proceeds.” On or after March 1, 2014, the Senior Notes may be redeemed in part or in full at the following percentages of the outstanding principal amount prepaid: 104.375% prior to March 1, 2015; 102.188% on or after March 1, 2015, but prior to March 1, 2016; and 100% on or after March 1, 2016.

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

In connection with the issuance of the Senior Notes, we entered into a registration rights agreement (the “Registration Rights Agreement”) which requires us to use commercially reasonable efforts to register notes having substantially identical terms as the Senior Notes with the SEC prior to March 5, 2011. In the event that a “Registration Default” occurs (as defined in the Registration Rights Agreement), then we will be required to pay additional interest on the Senior Notes in an amount equal to 0.25% per annum during the first 90-day period immediately following the occurrence of the first Registration Default. The additional interest will increase by 0.25% per annum for each subsequent 90-day period until all Registration Defaults have been cured, up to a maximum amount of 1.0% per annum.

 

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Contractual Obligations

We enter into long term contractual obligations and commitments in the normal course of business, primarily debt obligations and non cancelable operating leases. As of January 30, 2010, our contractual cash obligations over the next several periods are set forth below.

 

		Payments Due by Period
Contractual Obligations:		Total			<1 Year			2-3 Years			4-5 Years			Thereafter
		(dollars in millions)
Existing Debt Facilities(1)(2)		$	422.0		$	1.3		$	2.6		$	118.1		$	300.0
Other Long Term Obligations(3)			203.4			37.6			58.2			64.7			42.9
Operating Leases(4)			725.8			152.9			244.7			182.9			145.3
Letters of Credit			25.1			8.8			3.6			3.6			9.0
Purchase Obligations(5)			218.6			218.6			—			—			—
Total		$	1,594.9		$	419.2		$	309.1		$	369.3		$	497.2

 

(1)

As of January 30, 2010, we had the following amounts outstanding under our existing credit facilities: no amounts outstanding under the Opco revolving credit facility; $121.9 million under the Opco term loan; $150.0 million under the Term B Loans; and $150.0 million under the Term C Loans. The Opco revolving credit facility matures on July 6, 2012, the Opco term loan matures on July 6, 2014, the Term B Loans mature on June 26, 2015 and the Term C Loan was repaid in full on March 5, 2010 with a portion of the proceeds of the issuance of the Senior Notes. See “—Existing Credit Facilities.”

(2)

Excludes estimated interest under existing debt facilities of $259.3 million. Interest costs for the Opco term loan and revolving credit facility have been estimated based on interest rates in effect for such indebtedness as of January 30, 2010.

(3)

Other long-term obligations consist of self insurance liabilities, severance agreements, transitional services agreement with Limited Brands and Golden Gate and Limited Brands advisory fees.

(4)

We enter into operating leases in the normal course of business. Most lease arrangements provide us with the option to renew the leases at defined terms. The future operating lease obligations would change if we were to exercise these options, or if we were to enter into additional new operating leases.

(5)

Purchase obligations are made up of merchandise purchase orders, unreserved fabric commitments and liabilities to our third party travel administrator.

Critical Accounting Policies and Estimates

The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of our assets, liabilities, revenues, and expenses, as well as the related disclosure of contingent assets and liabilities at the date of the financial statements. Management evaluates its accounting policies, estimates, and judgments on an on-going basis. Management bases its estimates and judgments on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions and conditions.

Management evaluated the development and selection of its critical accounting policies and estimates and believes that the following involve a higher degree of judgment or complexity and are most significant to reporting its results of operations and financial position, and are therefore discussed as critical. The following critical accounting policies reflect the significant estimates and judgments used in the preparation of our consolidated financial statements. With respect to critical accounting policies, even a relatively minor variance between actual and expected experience can potentially have a materially favorable or unfavorable impact on subsequent results of operations. However, our historical results for the periods presented in the consolidated financial statements have not been materially impacted by such variances. More information on all of our significant accounting policies can be found in Note 1, “Summary of Significant Accounting Policies,” to the consolidated financial statements.

Revenue Recognition

We recognize sales at the time the customer takes possession of the merchandise which, for e-commerce revenues, reflects an estimate of shipments that have not yet been received by the customer. This estimate is

 

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based on shipping terms and historical delivery times. Amounts related to shipping and handling revenues billed to customers in an e-commerce sale transaction are classified as net sales, and the related shipping and handling costs are classified as cost of goods sold, buying and occupancy costs in the Consolidated Statements of Operations. Associate discounts are classified as a reduction of net sales in the Consolidated Statements of Operations. Net sales exclude sales tax collected from customers which is ultimately remitted to governmental authorities.

Additionally, we earn royalties on a development agreement with an unaffiliated franchisee for stores operating in the Middle East. Under this agreement, the third party operates stores that sell Express branded apparel and accessories purchased from us. We recognize royalty revenue when sales entitling us to royalty revenue occur at each of the franchisee locations, and receive payment for these royalties one month in arrears. Royalties are included in net sales in the Consolidated Statements of Operations.

We reserve for projected merchandise returns based on historical experience and various other assumptions that we believe to be reasonable. Merchandise returns are often resaleable merchandise and are refunded by issuing the same payment tender of the original purchase. Merchandise exchanges of the same product and price are not considered merchandise returns and, therefore, are not included in the population when calculating the sales returns reserve.

We sell gift cards in our retail stores and through our e-commerce website and third parties, which do not expire or lose value over periods of inactivity. We account for gift cards by recognizing a liability at the time a gift card is sold. We recognize income from gift cards when they are redeemed by the customer. In addition, income on unredeemed gift cards is recognized when it can be determined that the likelihood of the gift card being redeemed is remote and there is no legal obligation to remit the unredeemed gift cards to relevant jurisdictions (gift card breakage). The gift card breakage rate is based on historical redemption patterns.

Inventories

Inventories are principally valued at the lower of cost or market on a weighted-average cost basis. We record a lower of cost or market adjustment to our inventories, which is reflected in cost of goods sold, buying and occupancy costs in the Consolidated Statements of Operations, if the cost of specific inventory items on hand exceeds the amount we expect to realize from the ultimate sale or disposal of the inventory. The lower of cost or market adjustment calculation requires management to make assumptions and estimates, which are based on factors such as merchandise seasonality, historical trends, and estimated inventory levels, including sell-through of remaining units.

We also record an inventory shrinkage reserve calculated as a percentage of cost of sales for estimated merchandise losses for the period between the last physical inventory count and the balance sheet date. These estimates are based on historical percentages and can be affected by changes in merchandise mix and/or changes in shrinkage trends. We perform physical inventory counts twice a year (once each season) for the entire chain of stores and adjust the shrinkage reserve accordingly. If actual physical inventory losses differ significantly from the estimate, our results of operations could be adversely impacted. The shrinkage reserve reduces the value of total inventory and is a component of inventories on the Consolidated Balance Sheets.

Business Combinations

We account for business combinations under the purchase accounting method. The cost of an acquired company is assigned to the tangible and intangible assets purchased and the liabilities assumed on the basis of their fair values at the date of acquisition. The determination of fair values of assets and liabilities acquired requires us to make estimates and use valuation techniques when market value is not readily available. Any excess of purchase price over fair value of the tangible and intangible assets acquired, if any, is allocated to goodwill. On July 6, 2007, we were subject to a business combination in which Limited Brands sold a 75%

 

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interest in our company to investment funds managed by Golden Gate in exchange for cash. As a result, the purchase price paid to effect the Golden Gate Acquisition was allocated to state the assets acquired and liabilities assumed at their fair value.

Valuation of Long-lived Assets

Property and equipment and intangible assets with finite lives are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. In evaluating an asset for recoverability, we estimate the future cash flow expected to result from the use of the asset at the store level, the lowest identifiable level of cash flow, if applicable. If the sum of the estimated undiscounted future cash flows related to the asset are less than the carrying value, we recognize a loss equal to the difference between the carrying value and the fair value, usually determined by the estimated discounted cash flow analysis of the asset. Factors used in the valuation of long-lived and intangible assets with finite lives include, but are not limited to, management’s plans for future operations, brand initiatives, recent operating results, and projected future cash flows. Impairment charges are included in cost of goods sold, buying and occupancy costs in the Consolidated Statement of Operations.

Intangible assets with indefinite lives, primarily trade names, are reviewed for impairment annually in the fourth quarter and may be reviewed more frequently if indicators of impairment are present. The impairment review is performed by comparing the carrying value to the estimated fair value, usually determined using a discounted cash flow methodology. Factors used in the valuation of intangible assets with indefinite lives include, but are not limited to, management’s plans for future operations, brand initiatives, recent operating results, and projected future cash flows.

The discounted cash flow models used to estimate the applicable fair values involve numerous estimates and assumptions that are highly subjective. Changes to these estimates and assumptions could materially impact the fair value estimates. The estimates and assumptions critical to the overall fair value estimates include: (1) estimated future cash flow generated at the store level; and (2) discount rates used to derive the present value factors used in determining the fair values. These and other estimates and assumptions are impacted by economic conditions and expectations of management and may change in the future based on period-specific facts and circumstances. If economic conditions were to deteriorate, future impairment charges may be required.

Claims and Contingencies

We are subject to various claims and contingencies related to legal, regulatory, and other matters arising out of the normal course of business. Our determination of the treatment of claims and contingencies in the consolidated financial statements is based on management’s view of the expected outcome of the applicable claim or contingency. Management may also use outside legal advice on matters related to litigation to assist in the estimating process. We accrue a liability if the likelihood of an adverse outcome is probable and the amount is estimable. If the likelihood of an adverse outcome is only reasonably possible, or if an estimate is not determinable, disclosure of a material claim or contingency is disclosed in the Notes to the Consolidated Financial Statements. We re-evaluate these assessments on a quarterly basis or as new and significant information becomes available to determine whether a liability should be established or if any existing liability should be adjusted. However, the ultimate outcome of various legal issues could be different than management’s estimates and, as a result, adjustments may be required.

Income Taxes

Effective May 7, 2007, we reorganized as a partnership for federal income tax purposes. As such, with the exception of a limited number of state and local jurisdictions, we are no longer subject to income taxes. The members of the company, and not the company itself, are subject to income tax on their distributive share of our earnings from May 7, 2007 forward. We pay distributions to the members to fund their tax obligations attributable to taxable income of our company.

 

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We account for income taxes using the asset and liability method. Under this method, the amount of taxes currently payable or refundable are accrued and deferred tax assets and liabilities are recognized for the estimated future tax consequences of temporary differences that currently exist between the tax basis and the financial reporting basis of our assets and liabilities. For periods up to the effective date of our reorganization as a partnership for federal income tax purposes, deferred taxes were recognized on a separate company basis because we were taxable as a corporation until then. As a partnership, our deferred taxes for periods ending after May 7, 2007 are related to a limited number of state and local jurisdictions.

Deferred tax assets and liabilities are measured using the enacted tax rates in effect in the years when those temporary differences are expected to reverse. The effect on deferred taxes of a change in tax rates is recognized through continuing operations in the period that includes the enactment date of the change. Changes in tax laws and rates could affect recorded deferred tax assets and liabilities in the future.

In July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Financial Interpretation (“FIN”) 48, “Accounting for Uncertainty in Income Taxes,” (codified primarily in ASC 740) which clarifies the accounting for uncertainty in income taxes recognized in the financial statements in accordance with SFAS 109, “Accounting for Income Taxes” (codified primarily in ASC 740). FIN 48 provides that a tax benefit from an uncertain tax position may be recognized when it is more-likely-than-not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. Income tax positions must meet a more- likely-than-not recognition threshold at the effective date to be recognized upon the adoption of FIN 48 and in subsequent periods. This interpretation also provides guidance on measurement, derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.

We recognize tax liabilities in accordance with ASC 740 and we adjust these liabilities when our judgment changes as a result of the evaluation of new information not previously available. Due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from our current estimate of the tax liabilities. These differences will be reflected as increases or decreases to income tax expense and the effective tax rate in the period in which the new information becomes available.

We adopted FIN 48 effective February 4, 2007. As a result of the implementation of FIN 48, we recognized an increase of $0.7 million in our liability for unrecognized tax benefits, which was accounted for as a reduction to the February 4, 2007 retained earnings balance. Including this adjustment, we had $9.7 million of unrecognized tax benefits at February 4, 2007. Limited Brands retained the amount of FIN 48 liability for unrecognized tax benefits for any Predecessor period up to and including the date of the Golden Gate Acquisition.

We recognize interest and penalties related to unrecognized tax benefits within income tax expense in the accompanying Consolidated Statement of Operations. Accrued interest and penalties are included within the related tax liability line on the Consolidated Balance Sheets.

We may be subject to periodic audits by the Internal Revenue Service and other taxing authorities. These audits may challenge certain of our tax positions, such as the timing and amount of deductions and allocation of taxable income to the various jurisdictions.

Share-Based Payments

We recognize share-based compensation expense over the requisite service period expected to vest for stock awards issued to members of management based upon fair values at the grant date. We granted our first stock awards in December 2007 as a standalone company.

 

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We use a contingent claims approach utilizing the Black-Scholes option pricing model to estimate the fair value of share-based payment awards on the grant date. We also take into consideration the rights and preferences of awarded equity incentives. The application of this valuation model involves assumptions that are judgmental and highly sensitive in the valuation of stock awards, which affects compensation expense related to these awards. These assumptions include an estimate of the time to liquidity event, volatility and risk free rate over a period of time corresponding to the time to liquidity event. Since our stock has not been publicly traded and there is no historical or implied volatility information available, it is necessary to use historical volatility of shares of comparable publicly traded companies. When selecting comparable companies, consideration is given to industry similarity, financial data availability, active trading volume, and capital structure.

Another factor involving judgment that affects the expensing of share-based payments includes estimated forfeiture rates of share-based awards. These assumptions represent our best estimates and involve inherent uncertainties and the application of management judgment. If any of the assumptions used in the Black-Scholes model change significantly, share-based compensation for future awards may differ materially from the awards previously granted.

In the absence of a public trading market, management considered numerous objective and subjective factors, including information provided by an outside valuation firm to determine its best estimate of the fair market value of our common stock as of each valuation date. Valuations are performed annually, around the end of the third quarter or in the fourth quarter. We use the most recent valuation closest to the date shares are granted, and evaluate the results of the next valuation to determine if adjustments to the grant date fair value are required. In valuing Express Parent’s Class A and Class C Units, we first determine a business enterprise value by taking an average of the values calculated under two valuation approaches, the Income Approach and the Market Approach.

The Income Approach indicates the fair value of total invested capital based on the value of cash flows that the business can be expected to generate in the future. This approach is typically estimated through a discounted cash flow method using our weighted average cost of capital, which is calculated by weighting the required return on interest-bearing debt and common and preferred equity capital in proportion to their estimated percentages in an expected capital structure and is comprised of four steps: estimate future cash flows for a certain discrete projection period; discount these cash flows to present value at a rate of return that considers the relative risk of achieving the cash flows and the time value of money; estimate the residual value of normalized cash flows subsequent to the discrete projection period; and combine the present value of the residual cash flows with the discrete projection period cash flows to indicate the fair value of a marketable controlling interest in the business.

The Market Approach indicates the fair value of total invested capital based on a comparison of our company to comparable companies in similar lines of business that are publicly traded or which are part of a public or private transaction as well as prior company transactions. This approach can be estimated through the market comparable method, which compares our company to publicly traded companies in similar lines of business. The conditions and prospects of companies in similar lines of business depend on common factors such as overall demand for their products and services. An analysis of the market multiples of companies engaged in similar businesses yields insight into investor perceptions and, therefore, the value of our company. After identifying and selecting the comparable publicly traded companies, their business and financial profiles are analyzed for relative similarity. Consideration for factors such as size, growth, profitability, risk, and return on investment are also analyzed and compared to the comparable businesses. Once these differences and similarities are determined and proper adjustments are made, multiples of the publicly traded companies are calculated and applied to our operating results to estimate a marketable, minority interest value, to which a control premium is applied, as appropriate, to indicate a marketable, controlling interest value.

The amount of share-based compensation expense we recognize during a period is based on the portion of the awards that are ultimately expected to vest. We estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates.

 

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Recently Issued Accounting Pronouncements

Accounting Standard Codification (“Codification”) and the Hierarchy of GAAP

In June 2009, the FASB issued Accounting Standards Codification (“ASC”) Subtopic 105, Generally Accepted Accounting Principles, which reorganizes the thousands of United States GAAP pronouncements into roughly 90 accounting topics and displays all topics using a consistent structure. This standard establishes two levels of GAAP, authoritative and non-authoritative. The Codification is the source of authoritative, nongovernmental GAAP, except for rules and interpretive releases of the SEC, which are sources of authoritative GAAP for SEC registrants. This standard is effective for financial statements for interim or annual reporting periods ending after September 15, 2009. Effective February 1, 2009, we changed our historical United States GA