Express, Inc. (EXPR) Q2 2020 Results Earnings Conference Call August 26, 2020 8:30 AM ET
Company Participants
Dan Aldridge - Vice President of Investor Relations
Tim Baxter - Director, Chief Executive Officer
Perry Pericleous - Senior Vice President, Chief Financial Officer and Treasurer
Matt Moellering - President, Chief Operating Officer
Conference Call Participants
Marni Shapiro - Retail Tracker
Roxanne Meyer - MKM Partners
Steve Marotta - C.L. King & Associates
Susan Anderson - B. Riley
Janet Kloppenburg - JJK Research
Jennifer Redding - Wedbush Securities
Operator
Ladies and gentlemen, thank you for standing by and welcome to the Express Inc. second quarter 2020 earnings conference call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [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
Thank you Carol.. Good morning and welcome to our call. I would 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, maybe 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.
Tim Baxter
Thank you Dan and good morning everyone. During the second quarter, I reached the one year mark as CEO of Express and I have 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 the long term profitability of the 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 the 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 am as confident as ever that we are 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 e-commerce 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 topline and bottomline 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 controllable. 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 e-commerce 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 offering is within our control, we will soon unveil a bold new e-commerce 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 will provide channel specific commentary. Traffic and sales stabilized somewhat in July, with total comparable sales, including e-commerce, at approximately negative 20% for the month. This figure reflects retail comps, including e-commerce 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 e-commerce business where we saw improvements 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 e-commerce, 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 pick up in store capabilities to almost all of our retail locations. It's important to note that we have 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 are just in the very early stages.
Now let me turn to how we are 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 will start with product. As you know, we made the decision to halt production of the 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 are 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 will recall that a key component of our new strategy was to better reflect the way people dressed today, both through the design and presentation of our product. We have moved away from floor sets that were based on an outdated view of wearing occasion and began to establish our Express Edit philosophy. This approach was well received and customer response has been positive. Our focus areas for the third quarter are those categories where we can make market chain 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 have 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 jeans. Imagine the look of a designer premium jeans with the comfort of sweat pant. And we had strong selling in its first week. Second, we will introduce the perfectly polished jeans that was created with feedback from our customer on what they want from the denim they wear to work and to go out. And third, we introduced a new temperature control feature in our hyper stretch jeans 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 have made advancements, the customer has responded well. So I look forward to continuing to share our progress with you.
As a brand long known and turned 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 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 products. 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 called virtual influencer events and based on positive response we will 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 have 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 one of the relaunch 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 time 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 streamlined 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 have expanded our omnichannel capabilities. I referenced ship from store and buy online pick up in store, two critical ways our customers can now shop when, where and how they want. It also helps 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 reprioritized and reallocated investments to support what we believe 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 e-commerce 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 have heard me say before, a detour may change your route and it may change the speed with which you get to where you are 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
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 61% and Express factory outlet store sales were negative 43%. Second quarter comparable sales were negative 24% including store retail at negative 28% and outlet at negative 15%. Our sales continued 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 2,300 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 that deleveraged approximately 2,200 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 4,500 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 point 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 share 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 benefits 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 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.
Inventory 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 deliveries 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 of 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 begun flowing in August. We would expect our trends to improve as traffic recovers and as we continue to flow 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 benefit 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 abatement we have agreed to with a number of landlords. We appreciate the partnership shown by our landlords as we continue to renegotiate the majority of our leases. 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 the majority of the CARES Act benefits to materialize in 2021 as we are cutting 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 e-commerce 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.
Tim Baxter
Thanks Perry. Let me conclude where I began reflecting on what is transpired over the course of my first year as 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 toward profitability.
We completely reengineered our go-to-market process. We developed a thoughtful fleet rationalization plan, launched a new customer experience model in our stores and relaunched our customer loyalty program. We are creating product according to a clear design philosophy and presenting a compelling new brand positioning.
We accelerated a number of e-commerce 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 5.5 month 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 am 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 will turn the call back over to the operator so we can take your questions.
Question-and-Answer Session
Operator
[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
Hi guys. Sorry about that.
Tim Baxter
Good morning.
Marni Shapiro
Good morning. So I guess, Tim, a lot of good work going on and I am seeing them 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, can you talk about this confidence and what you are seeing? Is it being driven by online? So what's going to get you get this customer going again really in the back half of the year?
Tim Baxter
Yes. 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. This was the first delivery of fashion product we have had in three months. So the customer was starved for it and we are well-positioned to flow fashion product now through the back half of the year. So I would 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 e-commerce.
Marni Shapiro
So if I could follow-up just on the fashion specifically. How do you think about this in regards to men's business? Because the men's business is much more key item driven and you have had, I would say, the denim business there and things like polo shirts. But could you walk us through what the men's side of business could look like? I know women will be quicker to respond, as you said fashion has been very good.
Tim Baxter
Yes. 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 customers are responding to all of the new graphic tees that we have put out there. And it's not just logo, it's also art driven, photographic, there are a lot of great things. He has also responded 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 have 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 have seen our social media and what we are doing on the website, we are really showing a guy that he can wear a really comfortable pair of jeans that feels like sweats, a great traffic T-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 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
That's 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
Hi Marni. From back half of the year, we expect the inventory to be down at similar levels as we have seen them for Q2. So right now for Q2, we came down 14% and we do expect that we are 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 a similar levels.
Marni Shapiro
Fantastic. Best of luck. I will take the rest of them offline, guys. Thanks.
Tim Baxter
Thank you.
Perry Pericleous
Thanks Marni.
Operator
Your next question comes from Roxanne Meyer from MKM Partners. Please go ahead.
Roxanne Meyer
Great. Good morning and thanks for taking the question. I just wanted to follow-up on Marni's question. As it relates to the merchandise and the newness that you have, I think you said that there is 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 are evolving categories? I know you talked about over indexing to denim and mix. How are your categories, what is the time line, I guess, for your categories evolving?
Tim Baxter
Those are great questions, Roxanne. So I will 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 fashion 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 have said previously, we would expect to reflect our vision in the first quarter of 2021.
Roxanne Meyer
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, obviously you are in kind of an uncharted time, but in general, are you thinking about any changes to your promotional strategy?
Tim Baxter
We are definitely in unchartered times and they have certainly been more promotional than we would have anticipated. And I have always said that we will continue to be competitive from a promotional standpoint. So we will 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 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 have 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 are 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 product 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 customers are telling us that 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 aren't 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 categories. 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
Okay. Great. Thanks for all the color and best of luck in the fall.
Tim Baxter
Thanks Roxanne.
Operator
[Operator Instructions]. Your next question comes from Steve Marotta from C.L. King & Associates. Please go ahead.
Steve Marotta
Good morning, Tim and Perry. You have 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
Yes. Steve. Steve, did we lose you?
Steve Marotta
No. I am still here.
Perry Pericleous
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 is 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 in the timeframe. What we have done is taken action 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, mainly through our ABL.
And then for the second quarter, we delivered approximately $85 million in liquidity actions and that was mainly driven by the $100 million off of inventory cuts that we did in Q2. When you look at those inventory cuts, a lot of the cash benefit is coming is 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 are expecting, it is going to be spread between Q3 and Q4, mainly in Q3. So when you look at all that, including the working capital fluctuations, we are confident that we do have sufficient liquidity for the balance of the year and then to set us up for 2021.
Steve Marotta
That's very helpful. Perry, you also mentioned in your comments just a point of clarity, gross margin improvement is expected in the second half. I am assuming you are referring on a sequential basis as opposed to linear improvement on a year-over-year basis.
Perry Pericleous
Yes, Steve, absolutely. We are 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, back half of Q1 and then into Q2. And then with the fact that we have comparable redline 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 the spring season and that's the gross margin overall improvement.
Steve Marotta
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
That is correct. And that is part of CARES Act. So a part of CARES Act, you can carry back projected 2020 losses back to about five years and then be able to harvest 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.
Steve Marotta
And that's included within the $425 million of liquidity?
Perry Pericleous
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.
Steve Marotta
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
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 products out, which we agree, 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 set back in July due to hotspots. Have you seen, I guess, it sounds like August continues to be pressured. Is that due to hotspots in the stores? And then also on the e-commerce trend, did the 25% in July also continue into August with the products out? Thanks.
Tim Baxter
Good morning Susan. Yes, as I said, mall traffic continues to be challenging. So we saw that stabilization in July and that has continued. I am very encouraged by the momentum of e-commerce and I am very encouraged by the performance of our fashion product, our fashion deliveries in both stores and e-commerce. 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 see the inventory levels in that product increase. We are also dealing now with a shift of Labor Day out a week. I think that's an important factor for everybody to remember when you are thinking about August performance. This was the week of Labor Day last year and we are not in there until the week leading into Labor Day last year and we are not into that until next week.
Susan Anderson
That's helpful. Thanks. And then I am curious on denim. How did it perform in the quarter, as in with the new comfort denim. I guess, is that like a change in wash or an easier fit? How should we think about that?
Tim Baxter
It's a great question. Denim has continued to be a strong performing category for us in men's. A 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 they are new fit. There are two different things in your question.
There are new fits and we are certainly seeing a shift 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, the only jeans we had. So we have expanded leg shapes. 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 are also seeing extraordinary success. And so the Luxe comfort knit jeans, for example, it can be available in multiple fits. 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
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 or potentially on the border or even downsize some of the stores?
Tim Baxter
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 spent a lot of time understanding. So for example, we looked at the number of stores in the market and the potential transfer volume of a store. We looked at the impact closing a store would have on our e-commerce business in that market, because we know that that also happens. And we announced about 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 will 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 have 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 as we emerge from the pandemic.
Susan Anderson
Got it. That's really helpful. Thanks so much. Good luck in the back half.
Tim Baxter
Thank you.
Operator
Your next question comes from Janet Kloppenburg from JJK Research. Please go ahead.
Janet Kloppenburg
Hi everybody. Can you hear me?
Tim Baxter
Yes, we can. Good morning Janet.
Janet Kloppenburg
Hi. I am sorry I got on late. It sounds like -- can you hear me?
Tim Baxter
Yes, we can.
Janet Kloppenburg
It sounds like the new product is selling well. I am wondering when you will feel confident that the mix is where you want it to be in terms of legacy product versus the new product? And should we expect that in the third quarter?
Tim Baxter
Hi Janet. Yes, I had mentioned that I expect that as we have resumed flowing new receipts over the last couple of weeks and we will 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 e-commerce 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
Okay. And in terms of the denim assortments and content, is it fully complete and executed? Or will that go through further transitions, Tim, as we move through the rest of the year?
Tim Baxter
We have several additional launches planned for the balance of the year in denim. So while we have made very significant progress and we are proud of the progress we have 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
Okay. And just lastly, when giving your response to the question about store closings and customer experience, do you have confidence that the comfortable coming back to the mall and that Express can perform in that channel? Or will you look to relocate stores as we move forward?
Tim Baxter
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 are still in the midst of this that 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.
But what I will say is that I do believe that as the customer gets more and more comfortable and as traffic improves, I am 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 will 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
And just remind me of you ship from store capabilities?
Matt Moellering
Yes. Janet. We have all the last majority of our stores, about 90% of our retail stores, have ship from store capability.
Janet Kloppenburg
So are you able to fulfill the digital demand that way and control inventories, Matt? And what is the P&L of that endeavor look like? Is it more costly? It must be more costly than an in-store sale. So what does it look like versus a fulfillment sale?
Matt Moellering
Yes. So it has been extraordinarily effective in relieving inventory from stores that have closed for a long period of time and also some of stores in California still remain closed. And the P&L, it depends on how much, what 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 e-comm fulfillment center. When you have a plenty of split shipments, obviously shipment costs go up and that's an expense to the P&L, but we have algorithms we work on to optimize all of that.
Janet Kloppenburg
Thanks very much and good luck.
Tim Baxter
Thanks Janet.
Operator
Your next question comes from Jennifer Redding from Wedbush Securities. Please go ahead.
Jennifer Redding
Hi guys. Good morning. Can you talk a little bit more about the stores? Like what percentage of the store base is closed and the percent of sales? And if you are seeing any kind of shift to digital sales in those areas? Plus then also I was just wondering, are you happy with this whole 20% as the new product is working? Or do you think some of the products in there is not working? And what's working in that 20% and what isn't? Thanks.
Tim Baxter
So I will 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 of those stores closed in California. And then in New York, there are four closed stores. And we are seeing a shift to online in those locations or to other stores surrounding those in New York.
Jennifer Redding
Thank you.
Matt Moellering
And the second part of the question, Jen, obviously there are always going to be hits and misses when you are talking about fashion. But what I would say is, we have a whole lot more hits than misses.
Jennifer Redding
Great.
Matt Moellering
And which is why, yes, exactly. It's why I feel so encouraged by the results of the August fashion deliveries. The customers are responding really well to the fashion deliveries and as I said to big new programs like our Luxe comfort knit jeans.
Jennifer Redding
Good. And yes, you said results in August was similar to July. So it doesn't seem like maybe that's part of the reason you haven't seen acceleration in a lot of retail team potentially, do you think?
Tim Baxter
Yes. Look, I think that we have seen great momentum online. But we are still up against an assortment that was built around occasions, wearing occasions, occasions like wear to work and going out. Those were historically a part those of our core competencies and a year ago, our stores and our website were all organized that way. So we are still seeing 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 said, who have seen momentum who are in much more casual businesses, active businesses, loungewear businesses, so that into an 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
Great. Thank you.
Tim Baxter
Thank you.
Operator
And ladies and gentlemen, this concludes the question-and-answer session of our call and does wrap up the call for today. We would like to thank you all for participating. You may now disconnect.
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