Express Inc. (EXPR) Q2 2020 Earnings Call Transcript

Express Inc. (NYSE: EXPR) Q2 2020 earnings call dated Aug. 26, 2020

Corporate Participants:

Dan Aldridge — Vice President of Investor Relations

Timothy Baxter — Chief Executive Officer

Perry Pericleous — Senior Vice President, Chief Financial Officer and Treasurer

Matt Moellering — President and Chief Operating Officer

Analysts:

Marni Shapiro — The Retail Tracker — Analyst

Roxanne Meyer — MKM Partners — Analyst

Steven Marotta — C.L. King & Associates — Analyst

Susan Anderson — B. Riley FBR, Inc. — Analyst

Janet Kloppenburg — JJK Research — Analyst

Jennifer Redding — Wedbush Securities — Analyst

Presentation:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Express Inc. Second Quarter 2020 Earnings Conference Call. [Operator Instructions] Please be advised that today’s conference is being recorded.

[Operator Instructions] I would now like to hand the conference over to your speaker today Dan Aldridge, Vice President-Investor Relations. Please go ahead, Mr. Aldridge.

Dan Aldridge — Vice President of Investor Relations

Thank you, Carol. Good morning, and welcome to our call. I’d like to open by reminding you of the Company’s safe harbor provisions. Any statements made during this conference call, except those containing historical facts may be deemed to constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual future results may differ materially from those suggested in forward-looking statements due to a number of risks and uncertainties, all of which are described in the Company’s filings with the SEC, including today’s press release.

Express assumes no obligation to update any forward-looking statements or information, except as required by law. Our comments today will supplement the detailed information provided in both the press release and the investor presentation available on the Company’s Investor Relations website. In addition, you can locate a reconciliation of any adjusted results discussed in our comments to amounts reported under GAAP on our website or in our earnings release.

With me today are Tim Baxter, Chief Executive Officer; Perry Pericleous, Chief Financial Officer; and Matt Moellering, President and Chief Operating Officer.

I will now turn the call over to Tim.

Timothy Baxter — Chief Executive Officer

Thank you, Dan, and good morning, everyone. During the second quarter, I reached the one year mark as CEO of Express, and I thought a lot about what has transpired for our brand, our business, our associates, and our customers. By now, you all know that we unveiled a new corporate strategy in January, called The EXPRESSway Forward. We outlined many of the ways in which we would restore the relevance of the Express brand, the vitality of the Express business, and a long-term profitability for our Company.

We identified $80 million in cost savings to be realized over the next three years. And just six weeks later, we closed every one of our stores and turned our attention to taking immediate and appropriate action to ensure the necessary liquidity to weather the coronavirus storm.

Today, nearly six months into that storm, and against a backdrop of more than two dozen retailers having filed for bankruptcy this year, we have identified $425 million of liquidity measures to help keep our balance sheet strong and we continue to move our brand and our business forward.

We have advanced, and in many instances, accelerated critical initiatives within each of the four foundational pillars of The EXPRESSway Forward strategy. Let me be clear; our transformation is underway, our focus is on achieving profitability, and I’m as confident as ever that we’re on the right track to deliver our long-term goal of a mid-single-digit operating margin.

I say that not only as a relentless optimist, although I most certainly am one, but also because I believe that one of the most essential aspects of leadership is the ability to provide perspective. So while this pandemic has certainly been challenging, it is important to view our progress and our results in the appropriate and broader context.

There is of course still much more to do. We appear to be in the earliest stages of a recovery. The majority of our stores have reopened and we do see very encouraging signs. With significant momentum in our eCommerce business, strong customer response to our new product vision and brand positioning, and the pace at which we have been able to move through older inventory, I would expect to see top line and bottom line improvement as we drive towards profitability.

With that said, traffic in malls continues to be a challenge, so this will take some time. And while we monitor mall traffic, consumer confidence and other external factors, the executive leadership team and I are sharply focused on controlling the controllables; the aesthetic, relevance and value of our product; the voice of our brand; the way we communicate with and treat our customers; the quality and consistency of our execution; determining what to prioritize, how to sequence our plans for the future and when to take bold and decisive action to protect the financial health of our company, are all within our control.

There is a great deal of uncertainty about how, when, and in what way physical retail will rebound. What is certain is that across the entire retail industry, the momentum of eCommerce was already happening well before the pandemic, has accelerated significantly during the pandemic, and will absolutely continue to accelerate. And because advancing our digital capabilities and offerings is within our control, we will soon unveil a bold new eCommerce strategy.

Now let me walk you through how the second quarter unfolded. We began reopening our stores in early May following closures across our entire fleet due to the pandemic and saw consistent acceleration in traffic and sales in our stores through the third week of June with comparable sales down 15% as compared to down over 50% in early May.

As new hotspots emerged in several states in the fourth week of June, we saw an immediate impact. This was exacerbated by prolonged store closures in New York and the re-closing of a number of stores in California that remain closed today. In light of the impact these required closures have had on our business, I’ll provide some channel specific commentary.

Traffic and sales stabilized somewhat in July, with total comparable sales including eCommerce at approximately negative 20% for the month. This figure reflects retail comps including eCommerce of minus 24% and outlet comps of minus 16%. This was all achieved through a much more strategic approach to promotions. In fact, we did not anniversary two big site-wide promotions, one of which coincided with last year’s Amazon Prime Day.

July marked the second consecutive month of positive demand in our eCommerce business, where we saw improvement from negative 35% in early May to positive 25% in the back half of July. This all indicates that our strategy and our brand positioning are resonating with our customers.

And we have continued to see strength in eCommerce, which has been driven by the aggressive liquidation of spring product, new receipts flowing into the assortment, the completion of our website re-platform, and the expansion of ship-from-store and buy-online-pickup-in-store capabilities to almost all of our retail locations.

It’s important to note that we’ve enhanced our omnichannel capabilities since June and the customer reception has been promising, as we have seen both orders and sales increases from June to July. And we’re just in the very early stages.

Now, let me turn to how we’re moving forward and provide updates on some of the key initiatives in motion that support The EXPRESSway Forward strategy and our drive to profitability. I’ll start with products. As you know, we made the decision to halt production of a majority of June and July receipts, which is, of course, counterintuitive when establishing a new product vision, but it was the right thing to do for the financial health of our Company and to position us for fall.

As we began flowing new receipts over the last couple of weeks, response to our fashion product has been strong. We’re well positioned for the back half of the year and we expect that as we continue to flow newness into our assortments, we will generate better results. You recall that a key component of our new strategy was to better reflect the way people dress today, both through the design and presentation of our products.

We’ve moved away from floor sets that were based on an outdated view of wearing occasions and began to establish our Express Edit philosophy. This approach was well received and the customer response has been positive. Our focus areas for the third quarter are those categories where we can make market share gains now and into 2021; specifically, denim, men’s and women’s tops, and modern tailoring.

We will apply our Express Edit design and merchandising philosophy to each of these opportunities and our fall and holiday receipts reflect this. Let me just give you one example, Denim. You’ve heard me say that 78% of our customers wear denim to work, but only 17% purchase it from us. Since I shared that statistic with you in January, that 17% is now 22% and we just launched new jeans for fall that will address this opportunity and drive our market share.

First, we introduced our new Luxe Comfort Knit Jean. Imagine the look of a designer premium jeans with the comfort of a sweatpants, and we had strong selling its first week. Second, we’ll introduce the perfectly polished jean that was created with feedback from our customer on what they want from the denim they wear-to-work and go — and to go out.

And third, we introduced a new temperature control feature in our hyper stretch jean for men, which adds another dimension to our highly successful hyper stretch fabric platform. Finally, we continue to add new fits and washes across our denim offering. Fantastic denim at an affordable price from Express is a significant market share opportunity, and as we’ve made advancements, the customer has responded well. So I look forward to continuing to share our progress with you.

As the brand’s long known and turn to for occasion dressing, we of course saw declines when Easter, proms, graduations, weddings and so many other occasions simply did not happen this year. We expect that as we emerge from the pandemic and there is a surge of occasions and celebrations, that pent-up demand coupled with there being fewer places for customers to make these purchases could turn a 2020 headwind into a 2021 tailwind.

The work we have done to bring our new product vision, The Express Edit to life is resonating with customers. Despite the fact that the assortment today only reflects about 20% new product. That penetration will steadily increase as we continue to flow new receipts. And as we get into the fourth quarter, I expect our assortments to fully reflect this new vision. So that’s product.

Now let me turn to brand and customer. In the first half of the year, we presented our brand and engaged with our customers in new and more creative ways. We expanded our digital stylists program, held virtual influencer events, and based on positive response we’ll continue these activities through the back half of the year and into 2021. Customer response to our new brand positioning and marketing campaigns has been promising and we’ve seen increased audience reach and engagement across channels.

The combination of a reallocation of media spend and a new approach to messaging is showing both customers and prospects just how much there is to discover at Express. In the first week of August, we entered Phase 1 of the re-launch of our Customer Loyalty Program. One of the most effective ways for us to retain and increase spend among existing customers will be through this program. Now called Express Insider, the new offering includes a more robust portfolio of benefits and a more compelling customer value proposition.

In terms of driving stronger lifetime value, we already know that customers in the previous program had two times the spend and three times the tenure of non-loyalty customers. And in the first quarter of 2021 when we introduced a new four-tiered benefit system, the ability for customers to earn rewards faster should increase their engagement and deepen their relationship with Express.

And finally, execution. There are multiple aspects of execution, all of which support our drive to profitability. First, we have improved our speed. We implemented a new go-to-market process that reduces lead times and completed the implementation of new assortment planning and product lifecycle systems. These are the S5 and Bamboo Rose initiatives Matt spoke about at our January investor event.

S5 will bring more granularity to assortment planning. For example, new store clustering capabilities that will help optimize inventory investments. Bamboo Rose will support the go-to-market process through more streamline ordering and tracking and enhance communication through a shared interface between Express and our vendors. The combined result of these systems will be greater visibility, better decision making, and the ability to be more nimble, which I would expect will lead to product margin improvement over time.

Second, we’ve expanded our omnichannel capabilities. I referenced ship-from-store and buy-online-pickup-in-store, two critical ways our customers can now shop when, where, and how they want that also help us move through inventory more efficiently and effectively. These are both available in the majority of our retail stores today with refinements and enhancements to come by the end of the third quarter.

And finally, when it comes to execution is agility. While we significantly reduced the capital expenditures we had originally planned for the year, we also quickly re-prioritized and reallocated investments to support what we believed would aid us in coming through the pandemic and position us well for the future.

So we put our foot on the gas with regard to our digital business, completing the re-platform of our website and supporting critical elements of our omnichannel infrastructure, including the upcoming launch of the Klarna payment program on Express.com and the Express mobile app in mid-September.

We expect this capability will increase our average order value by providing financial flexibility for our customers. Given the landscape and the forces outside our control, the second quarter was certainly challenging. The fleet rationalization plan that we announced in January proved to be well timed, as our shift to greater investment in eCommerce has served us well over these last several months.

This pandemic is an unexpected and now extended detour on The EXPRESSway Forward. But as you’ve heard me say before, a detour may change your route and it may change the speed with which you get to where you’re going, but it does not change your final destination.

And now, Perry will review our second quarter results in more detail and outline the liquidity actions we have taken and continue to take to ensure the financial health of our business.

Perry Pericleous — Senior Vice President, Chief Financial Officer and Treasurer

Thank you, Tim. I will start with our second quarter results and current liquidity position and then provide details on the actions we have taken and will continue to take to mitigate the risk, manage uncertainty, and ensure the long-term health of our business.

Second quarter net sales were $246 million, a 48% decrease as compared to $473 million last year. Retail sales were negative 51% [Phonetic] and Express factory outlet store sales were negative 43%. Second quarter comparable sales were negative 24%, including total retail at negative 28% and outlets at negative 15%.

Our sales continue to be materially impacted by COVID-19 in the second quarter, as we had over 30% of our stores closed for more than half the quarter and some stores are still closed in California and New York. Our merchandise margin contracted by approximately 2300 basis points and was mainly driven by high levels of liquidation as we work through inventory that accumulated as a result of store closures in the first and second quarters.

We were able to liquidate a significant amount of clearance inventory, which should allow us to pull back on promotions in the back half of the year. Buying and occupancy was down $11 million on an absolute dollar basis, but deleveraged approximately 2200 basis points due to the decline in sales. The dollar reduction in buying and occupancy is driven by our fleet rationalization, rent savings, the organizational restructure that we announced in January and the incremental actions we took to preserve liquidity.

It should be noted that buying and occupancy was impacted by $6.8 million non-cash impairment charge related to certain stores and store assets. And this compares to a similar $2.3 million adjustment in the second quarter of last year. During the second quarter, we had a gross loss of $44 million with a gross margin rate of negative 18%, down approximately 4500 basis points as compared to the prior year, driven by the sales decline.

We expect the actions we have taken during the first half of the year, including the liquidation of clearance inventory will lead us to improvement in gross margin in the back half of the year. SG&A expenses were $93 million, a decrease of $43 million compared to last year. Similar to the B&O reduction, the reduction in SG&A expenses were driven by our fleet rationalization, the previously announced cost reductions associated with our corporate restructuring, and the incremental actions we took as part of our COVID-19 savings, which I will discuss shortly. As a percentage of sales, SG&A came in at 38%, deleveraging approximately 900 basis points as a result of the significant decline in sales.

On a GAAP basis, operating loss was $136 million as compared to last year’s operating loss of $10 million. Excluding the impact of the previously mentioned non-cash impairment charges, our adjusted operating loss for the second quarter was $129 million as compared to last year’s adjusted operating loss of $7 million. Second quarter diluted loss per share was $1.67 on a GAAP basis compared to a loss of $0.14 per diluted share in the second quarter of 2019.

Adjusted loss per diluted share was $1.48 as compared to last year’s adjusted loss per diluted share of $0.11. Excluded from this year’s loss was the tax benefit from the CARES Act, the valuation allowance recorded against our deferred tax assets, and the non-cash impairment charge that I previously mentioned.

Our effective tax rate for the second quarter was 21.5%. The rate reflects the previously mentioned valuation allowance recorded against our deferred tax assets. This was partially offset by the CARES Act benefit of cutting back projected 2020 net operating losses to prior tax years with a higher federal tax rate.

Turning to our balance sheet and cash flow, we ended the quarter with $193 million of cash and cash equivalents as compared to last year’s $154 million. This reflects the COVID-19 mitigation efforts that we have realized to-date. Our cash and also includes $165 million in proceeds from the revolver we drew down in March and we still have approximately $52 million available under this facility, subject to certain borrowing base limitations.

Operating cash flow for the second quarter was negative $39 million and capital expenditures were $6 million, resulting in free cash flow of negative $45 million. Our free cash flow for the quarter was positively impacted by $43 million of accrued rent expense. Our cash flow was also positively impacted by the previously mentioned efforts to reduce expenses and improve liquidity including, but not limited to, inventory cuts, expense and capital expenditure reductions.

Inventories were $232 million, a 14% decrease as compared to last year’s $269 million. Our inventory balance represented previously communicated actions we took as we began to see the impacts of COVID-19. As a reminder, we immediately took actions to reduce the balance of second quarter delivery by approximately $100 million and adjusted our plans for the fall season.

In addition, we will redirect approximately 300,000 units, representing $4 million, to deliver to our outlet channel in spring 2021. Our goal was to maintain the integrity for our assortment while minimizing our exposure due to excess inventory, which has put us in a healthier position by allowing us to increase the penetration of new items in our assortment as we head into the fall season.

As Tim mentioned, new receipts began flowing in August. We would expect our trends to improve as traffic recovers and as we continue to flow in new receipts in the back half of the year. During the first quarter, we took immediate action to ensure sufficient liquidity throughout the duration of this crisis, including drawing on our credit facility, reducing second quarter inventory receipts, identifying cost savings, reducing capital expenditures, and sustaining the benefits of the CARES Act. In total, these actions were expected to result in approximately $385 million in improved liquidity in 2020.

Since then, we have identified an incremental $40 million in liquidity savings, including approximately $20 million in rent abatements we have agreed to with a number of landlords. We appreciate the partnership shown by our landlords as we continue to negotiate — renegotiate the maturity of our leases.

We have — we also identified $20 million in additional store and corporate office related expense savings. Overall, these actions will result in approximately $425 million in improved liquidity in 2020, of which approximately $195 million was realized in the first quarter and approximately $85 million was realized in the second quarter, with the remainder expected in the fall season.

In addition to these actions, we have incremental liquidity levers we can pull, if necessary. As previously mentioned, we still have approximately $52 million available on our revolver and we will continue to identify additional expense reductions. Furthermore, we expect a majority of the CARES Act benefits to materialize in 2021 as we credit back 2020 losses to prior tax years. Our balance sheet currently reflects $89 million of income tax receivable of which approximately $80 million is expected to be received in Q2 of next year.

In summary, based on the immediate actions we took and continue to take in response to COVID-19, our liquidity position, and flexibility, the momentum of our eCommerce business, the strong response to our fashion receipts, and the reopening of our stores, all give us confidence that we have sufficient liquidity through fiscal 2020 and are well-positioned for improved results in 2021. This should help us achieve our long-term goal of a mid-single-digit operating margin.

I look forward to updating you on our progress next quarter and will now turn the call back to Tim.

Timothy Baxter — Chief Executive Officer

Thanks, Perry. Let me conclude where I began, reflecting on what has transpired over the course of my first year as the CEO of Express. We launched a new corporate strategy and set in motion a transformation of our products, our brands, our business, and our organization. We built a strong seasoned executive leadership team. We identified $80 million of cost savings to be realized over a three-year period as the first step in our drive towards profitability.

We completely re-engineered our go-to-market process. We developed a thoughtful fleet rationalization plan, launched a new customer experience model in our stores, and re-launched our customer loyalty program. We are creating products according to a clear design philosophy and presenting a compelling new brand positioning. We accelerated a number of eCommerce investments and initiatives, including the re-platform of our website and the launch of UpWest, a standalone, digitally-native brand. And while the size of UpWest business is not yet material to our results, it has exceeded our expectations and we have learned so much that will not only inform our digital strategy for UpWest, but also for Express.

We have made progress against each one of our four foundational pillars, and we have taken decisive and appropriate actions over the last five-and-a-half months to protect the financial health of this Company. Express is well positioned to emerge from this challenging period with the resources and abilities to achieve our goals, and as a more resourceful and agile organization.

I’m very proud of the way in which our associates have embraced our new culture, even while working remotely these last several months and the connectivity and collaboration across departments has never been stronger. My confidence in our team, our strategy and our future is as strong as ever.

Thank you for your time this morning. And I’ll turn the call back over to the operator so we can take your questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Your first question this morning comes from Marni Shapiro from Retail Tracker. Please go ahead. Marni, please go ahead. Your line is open.

Marni Shapiro — The Retail Tracker — Analyst

Hey guys, sorry about that.

Timothy Baxter — Chief Executive Officer

Good morning.

Marni Shapiro — The Retail Tracker — Analyst

Good morning. So I guess, Tim, a lot of good work going on and I’m seeing it online with the new deliveries and they look really good. But obviously, store traffic remains a problem. So I guess, could you talk about, you sound very confident in the back half of the year and with the assortments, could we talk about this confidence and what you’re seeing? Is it being driven by online? What’s going to get you — get this customer going again really in the back half of the year?

Timothy Baxter — Chief Executive Officer

Yeah, it’s a very good question, Marni. As I said, mall traffic continues to be challenging in August. But in spite of that, our August fashion deliveries are performing extraordinarily well both in-store and online. So the customer is responding extremely well to the new fashion.

The challenges in the business remain some of the core categories like men’s suiting, men’s dress shirts, women’s suiting, women’s wear — what we would have historically called wear-to-work. Those core categories for us remain very challenging. But the fashion product is selling in both channels, it’s selling very well in stores and it’s selling very well online. So I would expect that as we continue to flow fashion product, you know this was the first delivery of fashion product we’ve had in three months.

So that customer was starved for it and we’re well positioned to flow fashion products now through the back half of the year. So I’d expect us to see continued improvement in both channels. Although I do expect that traffic in stores is going to remain challenging. So our focus, Marni, is clearly on e-commerce and driving as much of the business as possible through eCommerce.

Marni Shapiro — The Retail Tracker — Analyst

And can I ask a follow-up just on the fashion specifically, how do you think about this in regards to the men’s business? Because the men’s business is much more key item driven. I mean you’ve had also a good denim business there and things like polo shirts. But could you think — could you walk us through what the men’s side of the business could look like. I know women will be quicker to respond if that fashion has been very good.

Timothy Baxter — Chief Executive Officer

Yeah. And actually our men’s fashion has been very good. And we actually have a very strong fashion consumer on the men’s side of our business. So key items will always continue to be important for us in men’s. But just as an example, our men’s denim business is very, very good and it’s what I would call actually explosive online, as we have advanced our denim strategy. So that’s an example of a core business in men’s that is doing extraordinarily well.

But our graphic tee business, which is a fashion business for men, our graphic tee business is fantastic. The customer is responding to all of the new graphics tees that we have put out there, and it’s not just logo, it’s also art driven, photographic. These are a lot of great things. He is also responding incredibly well to fashion within our short sleeve shirt programs, printed short sleeve shirts have been fantastic. And he is responding well to comfort in the modern tailoring categories.

So we’ve introduced several knit suits and the suits have been fantastic and I think the key, Marni, is really teaching the guy that a knit suit can be one of the most versatile things he has in his wardrobe. So if you’ve seen our social media and what we’re doing on the website, we’re really showing a guy that he can wear a really comfortable pair of jeans that feels like sweats, a great graphic tee-shirt and throw a knit jacket over the back of his chair and if he is on a Zoom call, he throws on that knit jacket and he looks like a million bucks.

So he — the male customer is actually responding really, really well to our fashion as well. And our men’s business is better than our women’s business right now.

Marni Shapiro — The Retail Tracker — Analyst

Fantastic. And can I just sneak in one last one. Did you guys talk about where your inventories are planned for the back half of the year?

Perry Pericleous — Senior Vice President, Chief Financial Officer and Treasurer

Hi Marni. From [Phonetic] back half of the year, we expect the inventories to be down at similar levels as we have seen them for Q2. So right now for Q2 we came down a 14% and we do expect that we’re going to continue to manage through our inventory and our promotional cadence in the balance of the year to ensure that the inventory levels are down at similar levels.

Marni Shapiro — The Retail Tracker — Analyst

Fantastic. Best of luck. I’ll take the rest of them offline, guys. Thanks.

Timothy Baxter — Chief Executive Officer

Thank you.

Perry Pericleous — Senior Vice President, Chief Financial Officer and Treasurer

Thanks Marni.

Operator

Your next question comes from Roxanne Meyer from MKM Partners. Please go ahead.

Roxanne Meyer — MKM Partners — Analyst

Great. Good morning and thanks for taking the question. I just wanted to follow-up on Marni questions. As it relates to the merchandise and the newness that you have, I think you said it’s about 20% newness currently. Can you talk about where that will be by the end of 3Q and how we should think about the progression to the end of the year?

And then I also wanted to draw a distinction between what’s new versus how you’re evolving categories. I know you talked about over indexing to denim and knits, how are your categories — what is the timeline I guess for your categories evolving?

Timothy Baxter — Chief Executive Officer

Those are great questions, Roxanne. The — so I’ll take the first part of it. About 20% of our inventory right now is, like we said, reflects this new brand edit and that’s because our action deliveries just began flowing again over the past several weeks. I would expect that by the beginning of the fourth quarter, as I said in my prepared remarks, that our entire assortment will fully reflect the Express Edit, the new Express Edit.

So, we have been slowly evolving the categories. I would have said that we would have been in much better shape in many of those categories had the second quarter played out the way we had intended as it was our intent to position many of those categories during that time. However, the categories are also being positioned as we move forward.

So, as we continue to flow receipts in the third quarter, the complexion of our inventory will further reflect with each delivery the Express Edit. And by the time we get to early in the fourth quarter, we should see it completely reflected, and that is in the retail business. The outlet business, as I’ve said previously, we would expect to reflect our vision in the first quarter of 2021.

Roxanne Meyer — MKM Partners — Analyst

Okay, great. And just, I guess, as a follow-up, as you shift and complete your category mix, how does that impact AUR and how are you thinking about — I mean, obviously we’re in kind of an unchartered times, but in general, are you thinking about any changes to your promotional strategy?

Timothy Baxter — Chief Executive Officer

We are definitely in unchartered times, and they have certainly been more promotional than we would have anticipated, and I’ve always said that we will continue to be competitive from a promotional standpoint. So we’ll continue to react during this unprecedented time and do what we believe we need to do to be competitive.

That being said, our stated vision to be a less promotional company remains intact, and strategically, we are building towards that. I think that it is likely that the fourth quarter of this year will be highly promotional as it always is, but I believe it will be more promotional than what we’ve seen in the past and I believe it will be prolonged. I think we are talking a lot about the fourth quarter likely starting a bit earlier in October and being more spread out to avoid those sort of peaks and valleys as customers look to avoid large crowds.

So, from a promotional perspective, our strategy remains the same. We’re working towards being a less promotional company and driving our business through customer and product initiatives. The AUR piece of your question, our AUR is building as we deliver more fashion and more elevated products into the assortment. And so when you look across categories, categories like women’s tops, where we have a much more significant investment in great fashion, our AUR is up.

The customer is responding well to those increases. So our customer is telling us that they will — they respond to value. It’s not necessarily about the price, it’s about the value that’s in the product. There are other categories that are working as well that are bringing our total AUR, however, down. So our actual — our average order value online and our average unit retails in stores are actually down.

Much of that is a function of mix because we are selling less men’s suits, for example, so — our most important category. So, some of that is a function of mix. Some of that is also a function of that increased promotionality that we experienced in the second quarter of this year.

Roxanne Meyer — MKM Partners — Analyst

Okay, great. Thanks for all the color and best to luck into the fall.

Timothy Baxter — Chief Executive Officer

Thanks, Roxanne.

Operator

[Operator Instructions] Your next question comes from Steve Marotta from C.L. King & Associates. Please go ahead.

Steven Marotta — C.L. King & Associates — Analyst

Good morning, Tim and Perry. You’ve laid out extensively, from a liquidity standpoint, where you stand right now, and I realize that you are not providing specific guidance. But the other side of the coin, from a liquidity standpoint of course is cash burn. Can you provide a little bit of detail on your confidence that the current liquidity levels will be enough to sustain through the balance of the year, given what is expected from a cash burn standpoint?

Perry Pericleous — Senior Vice President, Chief Financial Officer and Treasurer

Yes, Steve. Steve, did we miss you?

Steven Marotta — C.L. King & Associates — Analyst

No, I’m still here.

Perry Pericleous — Senior Vice President, Chief Financial Officer and Treasurer

Okay. So Steve, from a liquidity standpoint and a cash burn rate, obviously, there is not a really good rule of thumb for the cash burn rate because there are so many variables that goes into the cash burn rate. But when you look at it, our working capital needs fluctuate throughout the year. And typically, when you look at it, Q4 is a quarter that our working capital needs are lower and our cash builds during that timeframe.

What we have done is taking actions over the first — over the last several months to ensure liquidity for the balance of the year. We have announced $425 million of actions out of which we deliver on $195 million in the first quarter through — mainly to our ABL. And therefore, the second quarter we delivered approximately $85 million in liquidity actions and that was mainly driven by the $100 million of inventory cut that we did in Q2.

When you look at those inventory cuts, a lot of the cash benefit is coming. It’s spread between Q2 and Q3, given the terms that we have with our merchants. And then, when you look at the remaining liquidity that we’re expecting, it’s going to be spread between Q3 and Q4, mainly in Q3. So when you look at all that, including the working capital fluctuations, we’re confident that we do have sufficient liquidity for the balance of the year and then to set us up for 2021.

Steven Marotta — C.L. King & Associates — Analyst

That’s very helpful. Perry, you also mentioned, in your comments, just as point of clarity, gross margin improvement is expected in the second half. I’m assuming you’re referring, on a sequential basis, as opposed to linear improvement on a year-over-year basis.

Perry Pericleous — Senior Vice President, Chief Financial Officer and Treasurer

Yes Steve, absolutely. We’re expecting — we’re expecting our gross margin to improve as we go into the back half of the year compared to the first half of the year versus obviously last year Q3 and Q4 and the expectation of these improvements in the back half of the year, driven by the fact that Q2 we liquidated a lot of inventory that was — spring related inventory because our stores were closed for the vast majority of Q1 — half of Q1 and then to Q2.

And then with the fact that we have comparable red-line inventory going into Q3 compared to last year and now based on Tim’s comments as well, we have new receipts flowing, we believe that our merchandise margin is going to improve sequentially to spring — to the spring season and thus the gross margin overall improvement.

Steven Marotta — C.L. King & Associates — Analyst

That’s helpful. And also, one other question Perry, I believe you said that there is an $80 million cash tax benefit expected direct to Express in the second quarter of next year, is that accurate?

Perry Pericleous — Senior Vice President, Chief Financial Officer and Treasurer

That is correct. And that is part of CARES Act. So, a part of CARES Act, there is — you can carry back projected 2020 losses back to five years and then being able to harvest the tax gains or — sorry the operating profit from the previous years and then take that as a tax benefit and we do expect that to be approximately, at this point, $80 million that will be received in 2021. We expect that in the second quarter of 2021.

Steven Marotta — C.L. King & Associates — Analyst

And that’s included within the $425 million of liquidity?

Perry Pericleous — Senior Vice President, Chief Financial Officer and Treasurer

No, it’s not included. It’s not included as part of that. The actions that we announced as part of that $425 million, those are actions that we expect in 2020 to materialize. It doesn’t go beyond 2020.

Steven Marotta — C.L. King & Associates — Analyst

I understand. Excellent. Thank you. That’s very, very helpful.

Operator

Your next question comes from Susan Anderson from B. Riley. Please go ahead.

Susan Anderson — B. Riley FBR, Inc. — Analyst

Hi, good morning. Thanks for taking my questions. I was curious, it sounded like you thought back to college was very encouraging, especially with the new product out, which we agree, I think — we think it looks much better in the stores.

I was curious — I think you had said store productivity was 15% in June, but then setback in July due to hotspots. Have you seen, I guess, it sounded like August continue to be pressured, is that due to hotspots in the stores? And then also on the eCommerce trends, the 25% in July also continue into August with the new product out? Thanks.

Timothy Baxter — Chief Executive Officer

Good morning, Susan. Yeah, as I’ve said, mall traffic continues to be challenging. So we saw that stabilization in July and that has continued. I’m very encouraged by the momentum of eCommerce and I’m very encouraged by the performance of our fashion product, our new fashion deliveries in both stores and eCommerce. I would say that our results in the first few weeks of August are very similar to our results in July. But like I said, very strong response to that new fashion across both channels.

So as we continue to flow fashion over the course of the next several months and really reposition our inventories, I would expect our results to continue to improve because, honestly, it’s still a small percent of the total. It’s about 20% right now, as I said. So we need to — we need to see that inventories — the inventory levels in that product increase.

We’re also dealing now with the shift of Labor Day out a week. I think that’s an important factor for everybody to remember when you’re thinking about August performance, this was the week of Labor Day last year and we’re not in that until — the week leading into Labor Day last year and we are not into that until next week.

Susan Anderson — B. Riley FBR, Inc. — Analyst

That’s helpful, thanks. And then, I’m curious on the — on denim, how did it perform in the quarter. And then, with the new comfort denim, I guess is that like a change in wash or a looser fit or how should we think about that?

Timothy Baxter — Chief Executive Officer

So it’s a great question. So denim has continued to be a strong performing category for us in men’s. Very strong performing category for us in men’s. In women’s, we have been repositioning our denim inventories, and as we reposition the denim inventories, the response has been strong and our denim business has continued to improve.

The new jeans, it’s not really — I mean there are new fit, there are two different things in your question. There are new fits and we are certainly seeing a shift from — away from the super skinny in both men’s and women’s into different leg shapes. So, we have expanded our assortments to include those different leg shapes. In fact, when I started a year ago we only had a denim legging in women’s. It’s the only jean we had.

So, we have expanded leg shape. So there are different fits available across our denim assortment in both men’s and women’s today that were not available a year ago. The fabric platforms is a different conversation and the fabric platforms are where we’re also seeing extraordinary success and the — so the Luxe Comfort Knit Jean, for example, it has — it’s available — it can be available in multiple fits and so you can have it fit looser or you can have it fit slimmer. So there are two different things, both of which are having a positive impact on our denim business.

Susan Anderson — B. Riley FBR, Inc. — Analyst

Got it. That’s really helpful. And then lastly, how are you thinking about the store base? Is there opportunity now to maybe get out of some of the leases that are potentially on the border or even downsize some of the stores?

Timothy Baxter — Chief Executive Officer

That’s a great question. And I mentioned that we announced the fleet rationalization plan in January and that fleet rationalization plan was incredibly strategic and the decisions that we made were based on data that we had — that we had spent a lot of time understanding. So, for example, we looked at the number of stores in a market and the potential transfer volume of a store. We looked at the impact closing a store would have on our eCommerce business in that market because we know that that also happens. And we announced about a 100 store closures in that fleet rationalization.

Obviously, as this pandemic has unfolded and the duration of it has been significantly longer than any of us would have expected, we are continuing to review our fleet. But while I believe that we will likely have additional store closures, I think it’s premature to say right now what we would do, because we want to be very thoughtful in the total impact of the business on those store closures and on the customer experience in the markets where those stores exist. So that’s the first part.

The second part is that we continue to be in negotiations with all of our landlords. As Perry said, we’ve negotiated about $20 million in rent abatements thus far and we still have the majority of our landlords that we are working with and greatly appreciate — really greatly appreciate the partnership of many of our landlords who have agreed to new terms as we emerge from the pandemic.

Susan Anderson — B. Riley FBR, Inc. — Analyst

Got it. That’s really helpful. Thanks so much. Good luck in the back half.

Timothy Baxter — Chief Executive Officer

Thank you.

Operator

Your next question comes from Janet Kloppenburg from JJK Research. Please go ahead.

Janet Kloppenburg — JJK Research — Analyst

Hi everybody. Can you hear me?

Timothy Baxter — Chief Executive Officer

Yes we can. Good morning, Janet.

Janet Kloppenburg — JJK Research — Analyst

Hi. I’m sorry, I got on late. I was wondering — it sounds like, can you hear me?

Timothy Baxter — Chief Executive Officer

Yes we can.

Janet Kloppenburg — JJK Research — Analyst

Sounds like the new product is selling well. I’m wondering when you’ll feel confident that the mix is where you want it to be in terms of legacy products versus the new products and should we expect that in the third quarter?

Timothy Baxter — Chief Executive Officer

Hi, Janet. Yeah, I had mentioned that I expect that as we have resumed flowing new receipts over the last couple of weeks and we’ll continue to flow new receipts as we move through the third quarter that our assortments will fully reflect our new Express Edit and our new vision by the time we get to the early fourth quarter and that is in our full price retail and eCommerce channels, I would expect our outlet assortments to better reflect our vision or more fully reflect our vision by the time we get into 2021.

Janet Kloppenburg — JJK Research — Analyst

Okay. And in terms of the denim assortments and content, is it fully complete and executed or will that go through further transition, Tim, as we move through the rest of the year?

Timothy Baxter — Chief Executive Officer

We have several additional launches planned for the balance of the year in denim. So while we have made very significant progress and we’re proud of the progress we’ve made in the denim assortments that are in our stores and online now that assortment will continue to evolve and also will more closely reflect our ultimate vision for the assortment by the time we get into the fourth quarter.

Janet Kloppenburg — JJK Research — Analyst

Okay. And just lastly, when giving your response to the question about store closings and customer experience, do you have confidence that the consumer is going to feel comfortable coming back to the mall and that Express can perform in that channel or you look to relocate stores as we move forward?

Timothy Baxter — Chief Executive Officer

I think that’s a great question, Janet, and I think it may be premature to assess what the consumer behavior is going to be. It’s clear right now, while we’re still in the midst of this that, you know, a certain number of customers are not comfortable being in the mall environment. Our performance continues to be better in open-air environments where the customer seems to be more comfortable.

So I think it’s premature that — but what I will say is that I do believe that as the customer gets more and more comfortable and as traffic improves, I’m not sure to what level, but as traffic improves, that we are positioned very well to compete very effectively against the other players in the mall.

That being said, we do need to explore alternative locations for stores and we will be doing that as we head into 2021 testing some new things and we’ll talk a lot more about that as we get into the back half of the year. So we are exploring opportunities outside of the mall.

Janet Kloppenburg — JJK Research — Analyst

And just remind me of your ship-from-store capabilities?

Matt Moellering — President and Chief Operating Officer

Yeah, Janet, we have — of the vast majority of our stores, about 93% of our retail stores have ship-from-store capabilities.

Janet Kloppenburg — JJK Research — Analyst

So you’re able fulfil the digital demand that way and control inventories Matt and what is the P&L of that endeavor look like? Is it more costly than — it must be more costly than an in-store sale, so what does this look like versus a fulfilment sales?

Matt Moellering — President and Chief Operating Officer

Yeah. So, it has been extraordinarily effective in relieving inventory from stores that have been closed for a long period of time and also some of the stores in California have still remain closed. And the P&L, it depends on how much split shipments there are.

So we have a lot of algorithms to try to optimize shipments, so that we minimize split shipments. When you don’t have many split shipments, the P&L looks very similar to what we see at our eComm fulfilment center. When you have good amount of split shipments, obviously freight — shipping costs go up and match those investments in the P&L. But we have algorithms, we work on to optimize all of that.

Janet Kloppenburg — JJK Research — Analyst

Thanks very much and good luck.

Timothy Baxter — Chief Executive Officer

Thanks, Janet.

Operator

Your next question comes from Jennifer Redding from Wedbush Securities. Please go ahead.

Jennifer Redding — Wedbush Securities — Analyst

Hi guys. I was wondering, can you talk a little bit more about the stores, like what percentage of the store base is closed, what percent of sales and if you’re seeing any kind of shift to digital sales in those areas? And then also, I was just wondering, is it — are you happy with this full 20% as the new product is working or do you think some of the product in there is not working and what working investment is 20% and what isn’t [Phonetic]? Thanks.

Matt Moellering — President and Chief Operating Officer

Sure, I’ll take the first part of the question. So from a closed store standpoint right now, the only stores we have closed right now are in California and New York. So it obviously changes by the day. But we right now have 45 retail stores closed, 60 FO stores closed in California and then in New York, there are four closed stores. And we are seeing a shift to online in those location or to other store surrounding those in New York.

Jennifer Redding — Wedbush Securities — Analyst

Thank you.

Timothy Baxter — Chief Executive Officer

And the second part of the question, Jen. Obviously, there are always going to be hits and misses, when you’re talking about fashion. But what I would say is, we have a whole lot more hits than misses and which is why it feels…

Jennifer Redding — Wedbush Securities — Analyst

Great.

Timothy Baxter — Chief Executive Officer

Yeah, exactly. That’s why I feel so encouraged by the results of the August fashion deliveries. The customer is responding really well to the fashion deliveries and as I said to big new programs like Luxe Comfort Knit Jean.

Jennifer Redding — Wedbush Securities — Analyst

Great. And yeah, and you said results in August were similar to July, so it doesn’t seem like maybe that’s a part of the reason you haven’t seen acceleration, there is a lot of retail team, potentially, do you think?

Timothy Baxter — Chief Executive Officer

Yeah, look, I think that we have seen great momentum online, but we are still up against and assortment that was built around occasions, wearing occasions, occasions like wear-to-work and going out. Those were historically a part — those were our core competencies. And a year ago, our stores and our website were all organized that way. So we are still seeing that the big negative impact of people not attending occasions and people working from home and therefore their wardrobe needs changing.

So we see a big negative impact on that versus some others, as you’ve said, who have seen momentum who are in much more casual businesses, active businesses, loungewear businesses, so — intimate apparel business that have been very strong. So as we flow this new product and it more closely reflects a much more modern way that the customer dresses, I believe the results will continue to improve.

Jennifer Redding — Wedbush Securities — Analyst

Great, thank you.

Timothy Baxter — Chief Executive Officer

Thank you.

Operator

[Operator Closing Remarks]