UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No.            )

 

 

 

 

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Notice of

2018

Annual Meeting

of Stockholders

 

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Columbus, Ohio

May 3, 2018

LETTER TO OUR STOCKHOLDERS

FROM THE BOARD OF DIRECTORS

Dear Fellow Stockholders,

We remain steadfast in our commitment to maximizing long-term value for our stockholders and acknowledge the critical role that corporate governance plays in carrying out our commitment to you.  

 

I want to highlight a few corporate governance items that we are focused on.

 

Strategy and Performance. The Company is in the midst of executing its multi-year transformational strategy to position Express for long-term success as an omni-channel retailer. While 2017 financial performance fell short of expectations, the Company made significant progress against its strategic initiatives, which will serve as the foundation for value creation over the long-term. We saw these initiatives start to yield results as business performance began to improve as the year progressed. The Company’s e-commerce business continues to be a strength with growth of 22% on a comparable sales basis and record sales of over $500 million in 2017. E-commerce sales accounted for 24% of the Company’s total sales in 2017, up from 19% in 2016. The Company remains in a very strong financial position, generating significant cash flow and ending the 2017 fiscal year with more than $235 million in cash and no debt financing. As we look ahead, we are confident that continued execution of the strategy will lead to improved financial performance, continued strong cash flow generation, and in turn, increased value for our stockholders.

 

Capital Allocation. The Board, together with the management team, regularly evaluates the Company’s capital use strategy. Given the Company’s ability to generate strong cash flow, in November 2017 we approved a capital return plan for our stockholders in the form of a $150 million share repurchase program. In 2017, Express repurchased approximately 2.1 million shares of its common stock for $17.3 million. Subsequent to year end through April 4, 2018, Express used an additional $13.5 million to repurchase approximately 1.9 million shares of common stock. We remain committed to deploying capital in ways that will generate long-term value for our stockholders.

 

Board Composition. We understand the importance of having the right combination of skills and experience on the Board to oversee the Company as it carries out its strategy to transform and position itself for success in the ever-changing retail environment in which we operate. Our directors have deep and diverse experience in areas that are core to our growth strategy. We believe that Board refreshment can enhance a Board’s effectiveness. Our directors on average have a tenure of approximately 5 years on the Board. We are currently engaged in a formal search to add a new director with skills and experience that will strengthen the Board’s ability to oversee the Company as it carries out its growth strategy.

 

Executive Compensation. The overall design and target pay opportunity for Mr. Kornberg in 2017 was the same as it was in 2016.  We believe that Mr. Kornberg’s target pay opportunity should be competitive with the market and that actual compensation should align with Company performance. We achieve this through a pay-for-performance compensation design that includes rigorous performance targets. Accordingly, Mr. Kornberg’s actual compensation in 2017 was significantly less than target. Mr. Kornberg’s target pay opportunity will remain the same in 2018.

 

Stockholder Engagement. As part of our stockholder engagement process, we reached out to stockholders representing over a majority of our outstanding common stock this past year. We highly value our conversations with stockholders and as a Board, discuss and take into consideration feedback shared. The Board’s decision to approve a capital return program for our stockholders in late November 2017 was based in part on feedback received from our stockholders in 2017.  We would like to thank those who took the time to engage and share their viewpoints with us in 2017 and we look forward to continued engagement with stockholders in 2018.

 

We continue to believe in the long-term opportunity for the Company and remain committed to maximizing long-term value for our stockholders. Thank you for your continued support of Express.

 

Mylle H. Mangum

Chairman of the Board

 

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Notice of

2018 Annual Meeting of Stockholders

 

 

This proxy statement is issued in connection with the solicitation of proxies by the Board of Directors of Express, Inc. for use at the 2018 Annual Meeting of Stockholders and at any adjournment or postponement thereof. On or about May 3, 2018, we will begin distributing print or electronic materials regarding the annual meeting to each stockholder entitled to vote at the meeting. Shares represented by a properly executed proxy will be voted in accordance with instructions provided by the stockholder.

 

 

By Order of the Board of Directors,

Lacey Bundy

Senior Vice President, General Counsel and Corporate Secretary

Important Notice Regarding the Availability of Proxy Materials for the Annual Meeting of Stockholders to be held on June 13, 2018: this Notice of Annual Meeting and Proxy Statement and our 2017 Annual Report are available in the investor relations section of our website at www.express.com/investor. Additionally, and in accordance with the Securities and Exchange Commission (“SEC”) rules, you may access our proxy materials at www.proxyvote.com, a site that does not have “cookies” that identify visitors to the site.

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Table of Contents

 

 

 

 

 

 

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Proxy Statement Summary Information

The Board of Directors (the “Board”) of Express, Inc. (the “Company”) is soliciting your proxy to vote at the Company’s 2018 Annual Meeting of Stockholders (the “Annual Meeting”), or at any adjournment or postponement of the Annual Meeting. To assist you in your review of this proxy statement, we have provided a summary of certain information relating to the items to be voted on at the Annual Meeting in this section. For additional information about these topics, please review this proxy statement in full and the Company’s Annual Report on Form 10-K for 2017 which was filed with the SEC on April 4, 2018 (the “Annual Report”).

Our fiscal year ends on the Saturday closest to January 31. Fiscal years are referred to by the calendar year in which the fiscal year commences. All references herein to “2017”, “2016”, and “2015” refer to the 53-week period ended February 3, 2018, and the 52-week periods ended January 28, 2017 and January 30, 2016, respectively. Comparable sales for 2017 was calculated using the 53-week period ended February 3, 2018 relative to the 53-week period ended February 4, 2017.

In this proxy statement, we refer to adjusted operating income, adjusted diluted earnings per share (“Adjusted EPS”), and earnings before interest, taxes, depreciation, and amortization, and excluding the impact of non-core operating items (“Adjusted EBITDA”) which are financial measures that are not calculated in accordance with U.S. generally accepted accounting principles (“GAAP”). Please refer to Appendix A to this proxy statement for more information on adjusted operating income, Adjusted EPS, and Adjusted EBITDA and a reconciliation of such measures to reported operating income, diluted earnings per share (“EPS”), and net income, respectively, which are their most directly comparable GAAP measures.

2017 Business Performance

Financial performance declined in 2017 on a year over year basis, however, we continued to make meaningful progress against strategic initiatives that we believe will lead to long-term value creation for our stockholders. Our e-commerce business continues to be a strength, generating record sales of over $500 million in 2017, and accounting for 24% of net sales compared to 19% in 2016. We also continued to generate strong cash flow in 2017 and ended the year with over $235 million in cash and no debt on our balance sheet. The Company’s ability to generate cash flow beyond its investment needs led to the Board approving a capital return program for stockholders in the form of a new $150 million share repurchase program in 2017. The retail sector continues to face challenges and opportunities that come from rapid change. We continue to believe in the opportunities presented by the changing dynamics in retail and our ability to generate long-term value for our stockholders through focused execution of our strategy.

 

 

 

 

 

 

 

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2017 Compensation Highlights

 

 

 

 

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The chart below illustrates CEO actual realizable total direct compensation compared to target realizable total direct compensation for the 2015, 2016, and 2017 fiscal years. Actual realizable total direct compensation reflects the actual amount of pay our CEO can expect to receive from equity awards, including a current estimate of value for awards that have either not yet vested or have not yet been earned. For more information on CEO realizable compensation refer to “Executive Compensation—Compensation Discussion and Analysis—What We Pay and Why: Elements of Compensation—CEO Realizable Pay” on page 37.

CEO Realizable TDC⁽¹⁾: Target vs. Actual

For more information on 2017 CEO compensation refer to “Executive Compensation—Compensation Discussion and Analysis—What We Pay and Why: Elements of Compensation” beginning on page 31 and the Summary Compensation Table on page 43. For more information on our short-term cash incentive program refer to “Executive Compensation—Compensation Discussion and Analysis—What We Pay And Why: Elements of Compensation—Performance-Based Incentives—Short-Term Incentive Program” beginning on page 32. For information on our long-term equity incentive program see “Executive Compensation—Compensation Discussion and Analysis—What We Pay And Why: Elements of Compensation—Performance-Based Incentives—Long-Term Incentives” beginning on page 34.

 

 

 

 

 

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Governance Highlights

 

Proposals to be Voted on and Voting Recommendations

 

 

 

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Director Nominees

The following table provides summary information about our Class II director nominees. The Class II directors will be elected to each serve a three-year term that will expire at the Company’s 2021 annual meeting of stockholders.

 

Forward-Looking Statements

This proxy statement contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include any statement that does not directly relate to any historical or current fact and are based on current expectations and assumptions, which may not prove to be accurate. Forward-looking statements are not guarantees and are subject to risks, uncertainties, changes in circumstances that are difficult to predict, and significant contingencies, many of which are beyond the Company’s control. Many factors could cause actual results to differ materially and adversely from these forward-looking statements, including those set forth in Item 1A of the Company’s Annual Report on Form 10-K. The Company undertakes no obligation to publicly update or revise any forward-looking statements as a result of new information, future events, or otherwise, except as required by law.

 

 

 

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Frequently Asked Questions

about

Voting and the Annual Meeting

Who is entitled to vote at the meeting?

Only stockholders of record at the close of business on April 16, 2018, the record date for the Annual Meeting (the “Record Date”), are entitled to receive notice of and to participate in the Annual Meeting. If you were a stockholder of record on that date, you will be entitled to vote all of the shares that you held on that date at the Annual Meeting or at any adjournments or postponements of the meeting.

A list of stockholders of record entitled to vote at the Annual Meeting will be available at the Annual Meeting and will also be available for ten business days prior to the Annual Meeting between the hours of 9:00 a.m. and 4:00 p.m., Eastern Daylight Time, at the Office of the Corporate Secretary located at 1 Express Drive, Columbus, OH 43230. A stockholder may examine the list for any germane purpose related to the Annual Meeting.

What are the voting rights of the holders of Express, Inc. common stock?

Holders of Express, Inc. common stock are entitled to one vote for each share held of record as of the Record Date on all matters submitted to a vote of the stockholders, including the election of directors. Stockholders do not have cumulative voting rights.

How do I vote?

Beneficial Stockholders. If you hold your shares through a broker, bank, or other nominee, you are a beneficial stockholder. In order to vote your shares, please refer to the materials forwarded to you by your broker, bank, or other nominee, as applicable, for instructions on how to vote the shares you hold as a beneficial stockholder.

Registered Stockholders. If you hold your shares in your own name, you are a registered stockholder and may vote by proxy before the Annual Meeting via the Internet at www.proxyvote.com, by calling (800) 690-6903, or if you received paper copies of the proxy materials and proxy card in the mail, by signing and returning the enclosed proxy card. Proxies submitted via the Internet, by telephone, or by mail must be received by 11:59 p.m., Eastern Daylight Time, on June 12, 2018. You may also vote at the Annual Meeting by delivering your completed proxy card in person. If you vote by telephone or via the Internet you do not need to return your proxy card.

Why did I receive a Notice in the mail regarding the Internet Availability of Proxy Materials instead of a full set of proxy materials?

Under rules adopted by the SEC, we are making this proxy statement available to our stockholders primarily via the Internet (“Notice and Access”). On or about May 3, 2018, we will mail the Notice regarding the Internet Availability of Proxy Materials (the “Notice of Internet Availability”) to stockholders at the close of business on the Record Date, other than those stockholders who previously requested electronic or paper delivery of communications from us. The Notice of Internet Availability contains instructions on how to access an electronic copy of our proxy materials, including this proxy statement and our Annual Report, and also contains instructions on how to request a paper copy of the proxy materials.

Can I vote my shares by filling out and returning the Notice of Internet Availability?

No. The Notice of Internet Availability only identifies the items to be voted on at the Annual Meeting. You cannot vote by marking the Notice of Internet Availability and returning it. The Notice of Internet Availability provides instructions on how to cast your vote. For additional information, please see the section above titled “How do I vote?”

What are “broker non-votes” and why is it so important that I submit my voting instructions for shares I hold as a beneficial stockholder?

If a broker or other financial institution holds your shares in its name and you do not provide voting instructions to it, New York Stock Exchange (“NYSE”) rules allow that firm to vote your shares only on routine matters. Proposal No. 3, the ratification of PricewaterhouseCoopers LLP as the Company’s independent registered public accounting firm for 2018, is the only routine matter for consideration at the Annual Meeting. For all matters other than Proposal No. 3, you must submit voting instructions to the firm that holds your shares if you want your vote to count on such matters. When a firm votes a client’s shares on some but not all of the proposals, the missing votes are referred to as “broker non-votes.”

 

 

 

 

 

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What constitutes a quorum and how will votes be counted?

The presence at the Annual Meeting, in person or by proxy, of the holders of a majority of the outstanding shares of common stock entitled to vote will constitute a quorum for purposes of the Annual Meeting. A quorum is required in order for the Company to conduct its business at the Annual Meeting. As of the Record Date, 75,337,294 shares of common stock were outstanding.

Proxies received but marked as abstentions and broker non-votes will be included in the calculation of the number of shares considered to be present at the Annual Meeting for purposes of establishing a quorum.

What vote is required to approve each proposal?

 

What are my choices for casting my vote on each matter to be voted on?

 

Unless you give other instructions when you vote, the persons named as proxies, David Kornberg and Lacey Bundy, will vote in accordance with the Board’s recommendations. We do not expect any other business to properly come before the Annual Meeting; however, if any other business should properly come before the Annual Meeting, the proxy holders will vote as recommended by the Board or, if no recommendation is given, in their own discretion.

What happens if a director nominee does not receive a majority of the votes cast for his or her re-election?

Pursuant to the Company’s Corporate Governance Guidelines, the Board expects any director nominee who fails to receive a greater number of votes cast “for” than votes cast “against” his or her re-election to tender his or her resignation for consideration by the Compensation and Governance Committee. The Compensation and Governance Committee will act on an expedited basis to determine whether to accept the director’s resignation and will submit such recommendation for prompt consideration by the Board. The Board expects the director whose resignation is under consideration to abstain from participating in any decision regarding the resignation. The Compensation and Governance Committee and the Board may consider any factors they deem relevant in deciding whether to accept the director’s resignation.

May I change my vote or revoke my proxy?

Beneficial Stockholders. Beneficial stockholders should contact their broker, bank, or other nominee for instructions on how to change their vote or revoke their proxy.

 

 

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Registered Stockholders. Registered stockholders may change their vote or revoke a properly executed proxy at any time before its exercise by:

Can I attend the Annual Meeting?

Subject to space availability, all stockholders as of the Record Date, or their duly appointed proxies, may attend the Annual Meeting. Since seating is limited, admission to the Annual Meeting will be on a first-come, first-served basis. Registration will begin at 8:00 a.m., Eastern Daylight Time. If you attend, please note that you may be asked to present valid photo identification, such as a driver’s license or passport, and will need to check in at the registration desk prior to entering the Annual Meeting. Please also note that if you are a beneficial stockholder (that is, you hold your shares through a broker, bank, or other nominee), you will need to show proof of your stock ownership as of the Record Date, such as a copy of a brokerage statement, to present at the registration desk in order to gain admission to the Annual Meeting. Cameras, cell phones, recording devices, and other electronic devices will not be permitted at the Annual Meeting other than those operated by the Company or its designees. All bags, briefcases, and packages will be subject to search.

 

 

 

 

 

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Election of Class II Directors

(Proposal No. 1)

The Board and its Compensation and Governance Committee are committed to ensuring that the Board possesses the right diversity of backgrounds, skills, experience, and perspectives to constitute an effective Board. The Board currently consists of seven members and is divided into three classes of directors, with two Class I directors, three Class II directors, and two Class III directors. The current term of our Class II directors expires at the Annual Meeting, while the terms for Class III and Class I directors will expire at our 2019 and 2020 annual meetings of stockholders, respectively.

Mr. Devine, Mr. Kornberg, and Ms. Mangum currently serve as Class II directors. Mr. Devine and Ms. Mangum are each independent and Mr. Kornberg serves as our President and CEO. Upon the recommendation of the Compensation and Governance Committee, the Board has nominated Mr. Devine, Mr. Kornberg, and Ms. Mangum for re-election as Class II directors, to each serve three-year terms expiring at the 2021 annual meeting of stockholders. Mr. Devine and Ms. Mangum have each served as a director since 2010 and were each elected to serve a three-year term most recently at our 2015 annual meeting of stockholders. Mr. Kornberg has served on the Board since January 2015 when he was appointed to the Board in connection with his promotion to President and CEO of the Company and thereafter was elected to serve a three-year term at our 2015 annual meeting of stockholders.

Mr. Devine, Mr. Kornberg, and Ms. Mangum have consented to serve if elected. If re-elected, each of Mr. Devine, Mr. Kornberg, and Ms. Mangum will hold office until his or her respective successor has been duly elected and qualified or until his or her earlier resignation or removal. If Mr. Devine, Mr. Kornberg, or Ms. Mangum becomes unavailable to serve as a director, the Board may either designate a substitute nominee or reduce the number of directors. If the Board designates a substitute nominee, the persons named as proxies will vote for the substitute nominee designated by the Board.

Information with respect to our Class II director nominees and our continuing Class I and Class III directors, including their recent employment or principal occupation, a summary of select qualifications, skills, and experience that led to the conclusion that they are qualified to serve as directors, the names of other public companies for which they currently serve as a director or have served as a director within the past five years, their period of service on the Board, and their ages as of the Record Date, are provided in this section. The Board believes that our continuing directors, together with our director nominees, possess a complementary and diverse set of qualifications, skills, and experience to allow the Board to function at a high-level and fulfill its responsibilities to our stockholders. Please refer to “Corporate Governance — Board Composition” on page 14 for other information about our Board, including a description of the qualifications, skills, and experience that the Board believes are important in order to effectively oversee the Company as it carries out its growth strategy and commitment to long-term value creation.

 

 

 

 

 

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Nominees For Class II Directors For Election at the 2018 Annual Meeting

 

 

 

 

 

 

 

 

 

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Class III Directors With Terms Continuing Until the 2019 Annual Meeting

 

 

 

 

 

 

 

 

 

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Class I Directors With Terms Continuing Until the 2020 Annual Meeting

 

 

 

 

 

 

 

 

 

 

 

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Corporate Governance

Board Responsibilities

The Board is responsible for overseeing the affairs of the Company in order to generate sustainable long-term value for our stockholders and does so through oversight of the Company’s (1) strategy and performance, (2) management, including succession planning, (3) risk management program, (4) compliance and corporate responsibility programs, and (5) other corporate governance practices, including stockholder engagement.

 

The Board believes that effective oversight is best achieved through (1) having the right combination of people on the Board, (2) an effective Board leadership and committee structure, and (3) effective Board practices. The Board continually reassesses the composition of the Board, the Board’s leadership and structure, and its governance practices and believes that the continuing directors, along with the director nominees, together have a complementary and diverse set of skills, backgrounds, experiences, and perspectives to constitute an effective Board; and furthermore, that the Board’s leadership and committee structure as well as its governance practices are effective. See “Board Composition” below and “Election of Class II Directors (Proposal No. 1)” on page 9 for more information about the composition of the Board; see “Board Leadership and Structure” on page 17 for more information about the Board’s leadership structure and its committees; and see “Board Practices” on page 20 for more information about the Board’s governance practices.

 

 

Board Composition

The Board and its Compensation and Governance Committee are committed to ensuring that the Board possesses the right diversity of backgrounds, skills, experience, and perspectives to constitute an effective Board. The Compensation and Governance Committee is responsible for developing the criteria for, and reviewing periodically with the Board, the skills and characteristics of nominees, as well as the composition of the Board as a whole. These criteria include independence, diversity, age, skills, tenure, and experience in the context of the needs of the Board. The Compensation and Governance Committee also considers a number of other factors, including the ability to represent all stockholders without a conflict of interest; the ability to work in and promote a productive environment; sufficient time and willingness to fulfill the substantial duties and responsibilities of a director; a high level of character and integrity; broad professional and leadership experience and skills necessary to effectively respond to complex issues encountered by a publicly-traded company; and the ability to apply sound and independent business judgment.

 

 

 

 

 

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The Board believes that it has the right mix of qualifications, skills, experience, and perspectives that allow it to fulfill its responsibilities, including overseeing management’s execution of the Company’s corporate strategy which is designed to create long-term stockholder value. The information below shows how the Board’s collective qualifications, skills, and experience relate to the Company’s corporate strategy. For biographical information regarding each of our directors and their individual qualifications, skills, and experience see, “Election of Class II Directors (Proposal No. 1)” beginning on page 9.

 

 

 

 

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As previously noted, in addition to ensuring that the Board collectively has a diverse set of competencies, experience, and perspectives, the Compensation and Governance Committee and Board also consider independence as well as diversity, age, and tenure. The charts below show certain demographic information about our Board as of April 16, 2018.

 

 

In order to assure the appropriate balance between members with new and different perspectives and those with a deep understanding of the Company built up over many years, the Compensation and Governance Committee reviews a director’s continuation on the Board each time such director’s term of office expires. In addition, the Company’s Corporate Governance Guidelines provide that a director will not be nominated for re-election if he or she is 72 years of age or older at the time of nomination. The Board believes that together these practices are effective at ensuring an appropriate balance between experience and a fresh perspective on the Board.

 

 

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The Compensation and Governance Committee is responsible for identifying, recruiting, and recommending candidates for the Board and is responsible for reviewing and evaluating any candidates recommended by stockholders.

The following shows our nomination process for candidates to our Board:

 

The Compensation and Governance Committee is currently undergoing a formal search to add a new director with skills and experience that will strengthen the Board’s ability to oversee the Company as it carries out its growth strategy.

The Compensation and Governance Committee considers all director candidates, including candidates proposed by stockholders in accordance with our Bylaws, based on the same criteria. The Compensation and Governance Committee may engage third party search firms to identify potential director nominees.

Board Leadership & Structure

 

Ms. Mangum has served as the Company’s independent Chairman since assuming the role at our 2016 Annual Meeting of Stockholders. The independent Chairman’s roles and responsibilities include: (1) establishing the Board agendas and schedules to confirm that appropriate topics are reviewed and sufficient time is allocated to each; (2) providing input to the CEO with respect to the information provided to the Board; (3) serving as a liaison between the independent directors and the CEO; (4) presiding at the executive sessions of independent directors; (5) facilitating communications and coordination of activities among the committees as appropriate; and (6) approving and coordinating the retention of advisors and consultants to the Board.

Our Corporate Governance Guidelines provide that the roles of Chairman and CEO may be separated or combined. The Board exercises its discretion in combining or separating these positions as it deems appropriate. The Board believes that the combination or separation of these positions should be considered as part of the succession planning process. In the event that the Chairman is not independent, the Board believes that it is beneficial for the independent directors to appoint an independent Lead Director. Currently, the Board believes that having an independent Chairman best serves the Board in its oversight role.

 

 

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The Board has two standing committees: an Audit Committee and a Compensation and Governance Committee. The composition and leadership of these committees are shown in the table below. In the future, the Board may establish other committees, as it deems appropriate, to assist it with its responsibilities. The committees report to the Board as they deem appropriate, and as the Board may request. Each standing committee operates under a charter that has been approved by the Board and each is comprised solely of independent directors.

 

AUDIT COMMITTEE

Audit Committee Responsibilities

 

 

The Audit Committee also prepares the Audit Committee Report that SEC rules require to be included in our annual proxy statement. This report is on page 57 of this proxy statement.

Audit Committee Meetings

The Audit Committee met eight times in 2017. The Audit Committee generally has eight regularly scheduled meetings per year and has an opportunity at each meeting to speak with the lead audit partner from the Company’s independent registered public accounting firm as well as the Company’s director of internal audit without any other members of management present. In addition, the Audit Committee Chair has regularly scheduled teleconferences with each of the Company’s Chief Financial Officer and the lead audit partner from the Company’s independent registered public accounting firm.

 

 

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Audit Committee Practices

At the end of each quarter, the Audit Committee reviews and discusses with management and the Company’s independent registered public accounting firm the Company’s financial results, press releases concerning the Company’s financial performance and earnings estimates, any significant control deficiencies identified and steps management has taken or plans to take to remediate the deficiencies, significant estimates and proposed adjustments to the financial statements, reports to the Company’s ethics hotline, internal audit activities and reports, risk management activities, and the results of the independent registered public accounting firm’s review or audit of the Company’s financial statements, among other things.

Each year the Audit Committee evaluates the performance of the Company’s independent registered public accounting firm and considers whether it is in the best interests of the Company and its stockholders to engage the firm for another year. As part of its evaluation, the Audit Committee considers the qualifications of the persons who will be staffed on the Company’s engagement, including the lead audit partner, quality of work, firm reputation, independence, fees, retail experience, and understanding of the Company’s financial reporting processes, policies, and procedures. The Audit Committee solicits feedback from management as part of its evaluation process.

Pursuant to the audit partner rotation requirement of the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”), the Company will have a new lead audit partner beginning with the Company’s 2018 fiscal year. In 2017, the Audit Committee engaged in a rigorous selection process to ensure that the Company’s new lead audit partner has the appropriate experience and skills to serve in such role. In addition, the Audit Committee worked with the outgoing lead audit partner and incoming lead audit partner on a succession plan to ensure a proper transition.

Audit Committee Independence and Expertise

The Board has affirmatively determined that (1) each of our Audit Committee members meets the definition of “independent director” for purposes of serving on the Audit Committee under both Rule 10A-3 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the NYSE listing rules, and (2) each qualifies as an “audit committee financial expert,” as such term is defined in Item 407(d)(5) of Regulation S-K.

Audit Committee Charter

The Audit Committee Charter may be viewed in the investor relations section of our website at www.express.com/investor. We will also provide a copy of the charter in print without charge upon written request delivered via email to IR@express.com or by mail to Express, Inc. 1 Express Drive, Columbus, OH 43230, Attention: Investor Relations.

COMPENSATION AND GOVERNANCE COMMITTEE

Compensation and Governance Committee Responsibilities

 

 

 

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The Compensation and Governance Committee also prepares the Compensation and Governance Committee Report that SEC rules require to be included in our annual proxy statement. This report is on page 42 of this proxy statement.

Compensation and Governance Committee Independence

The Board has affirmatively determined that each of our Compensation and Governance Committee members meets the definition of “independent director” for purposes of serving on the Compensation and Governance Committee under both Rule 10C-1 of the Exchange Act and the NYSE listing rules.

Compensation and Governance Committee Meetings

The Compensation and Governance Committee met six times in 2017. The Compensation and Governance Committee generally has six regularly scheduled meetings per year and has an opportunity at each meeting to speak with the Compensation and Governance Committee’s independent compensation consultant.

Compensation and Governance Committee Practices

See “Executive Compensation—Compensation Discussion & Analysis—Executive Compensation Practices” on page 39 for additional information about the Compensation and Governance Committee’s practices.

Compensation Committee Interlocks and Insider Participation

None of the members of the Compensation and Governance Committee has been an officer or employee of the Company. No interlocking relationships exist between the members of the Board or Compensation and Governance Committee and the board of directors or compensation committee of any other company.

Compensation and Governance Committee Charter

The Compensation and Governance Committee Charter may be viewed in the investor relations section of our website at www.express.com/investor. We will also provide a copy of the charter in print without charge upon written request delivered via email to IR@express.com or by mail to Express, Inc. 1 Express Drive, Columbus, OH 43230, Attention: Investor Relations.

Board Practices

 

The Board has deep experience in the area of strategy and business development, with much of that experience gained in the retail sector. At least once per year, the Board and management engage in an in-depth discussion and align on the Company’s corporate strategy which is designed to create long-term stockholder value and serves as the foundation upon which goals are established and decisions are made. Short and medium term objectives are developed to support achievement of the long-term strategy and the Board monitors management’s progress against such objectives.

 

 

 

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As part of its management oversight responsibilities, the Board assesses whether the Company has the management talent needed to successfully pursue the Company’s strategy, monitors management’s execution of the Company’s strategy, and provides advice to management as a strategic partner. The Board believes that open communications between the Board and management play a key role in effective oversight. Accordingly, in addition to formal meetings, individual directors and members of management engage in frequent dialogue in between meetings concerning the business.

The Board is responsible for succession planning for the CEO position and for monitoring and advising on management’s succession planning for other executive officers and key contributors. The Board reviews and discusses succession plans for the CEO position and the Company’s other executive officers and key contributors at least once annually, usually as part of the annual talent review of the executive leadership and key contributors in the Company. As part of the annual talent review process, the CEO shares his evaluation of the executive leadership in the business and makes recommendations and evaluations of potential successors, along with a review of any development plans recommended for such individuals. Directors become familiar with potential successors for key management positions through various means, including annual talent reviews, presentations to the Board, and communications outside of meetings.

 

The Board is committed to ensuring that the Board and the management team together cultivate a high-performing, collaborative corporate culture that emphasizes the importance of acting according to high ethical standards and in compliance with legal requirements. The Board receives a compliance update each quarter from the Company’s General Counsel who has day-to-day oversight responsibilities for the Company’s compliance program. On an annual basis, the Board reviews with management the Company’s top compliance risks based on an updated risk assessment, steps management is taking to reduce compliance risk, and key compliance initiatives for the upcoming year.

The Company’s reputation and commitment to corporate responsibility, including respect for human rights, the environment, our communities, and associates, play an important role in our ability to create long-term stockholder value. While matters of corporate responsibility are integrated within various Board discussions, the Board also dedicates specific time during each year to review and discuss the Company’s corporate responsibility program, including plans and progress against key initiatives.

 

 

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Our stockholders’ views on corporate governance and executive compensation are important to us and we value and utilize the feedback and insights that we receive. Each year, as part of our annual stockholder engagement cycle described below, we reach out to our largest stockholders who collectively hold over a majority of the shares of our outstanding common stock, which generally includes approximately our 20 largest stockholders. Our Chief Executive Officer, Chief Financial Officer, and Vice President of Investor Relations also routinely engage with stockholders throughout the year outside of our annual stockholder engagement program. Stockholders may request meetings with management or directors by sending a written request to the Office of the Corporate Secretary at 1 Express Drive, Columbus, OH 43230 or via email to IR@express.com.

 

STOCKHOLDER ENGAGEMENT CYCLE

 

The Board’s decision to approve a capital return program for our stockholders in November 2017 was based in part on feedback received from our stockholders during the year. We also received feedback from several investors that helped to inform our proposal for a new equity incentive plan which is described more fully in “Proposal No. 4: Approval of the Express, Inc. 2018 Incentive Compensation Plan.” In addition, Mr. Kornberg’s compensation package was originally designed based in part on feedback received from stockholders on our executive compensation in prior years.

For more information regarding our 2017 stockholder engagement efforts, see “Executive Compensation—Compensation Discussion and Analysis—Executive Compensation Practices—Stockholder Engagement and Annual Advisory Vote on Executive Compensation” on page 40.

 

Stockholders and other interested parties may contact an individual director, including the independent Chairman, the Board as a group, or a specified Board committee or group, including the independent directors as a group, at the following address: Office of the Corporate Secretary, Express, Inc., 1 Express Drive, Columbus, OH 43230 Attn: Board of Directors. Any correspondence should clearly indicate whether the correspondence is intended for an individual director, the Board as a group, or a specified committee or group of directors.

All such reports or correspondence will be forwarded to the appropriate director or group of directors as indicated on the correspondence unless the correspondence is of a trivial nature, irrelevant to the Board’s responsibilities, or already addressed by the Board. A report will be made to the Audit Committee of all communications to the Board, and all such correspondence is made available to all directors.

 

The Board held a total of 13 meetings, in person and by telephone, during 2017. Each director attended at least 75% of Board meetings held during the year, as well as at least 75% of meetings of the committees on which he or she served during 2017. Directors are expected to attend our annual meetings of stockholders. All of our directors attended our 2017 annual meeting of stockholders.

 

 

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The independent directors are given an opportunity to meet in executive session at each Board meeting and do so routinely.

 

The Board has adopted policies and procedures to ensure effective governance of Express. Our Corporate Governance Guidelines may be viewed in the investor relations section of our website at www.express.com/investor. We will also provide the Corporate Governance Guidelines in print without charge upon request by telephone at (888) 423-2421, via email to IR@express.com, or via mail delivered to Express, Inc., 1 Express Drive, Columbus, OH 43230, Attention: Investor Relations.

The Compensation and Governance Committee reviews our Corporate Governance Guidelines from time to time as necessary, but no less than annually, and may propose modifications to the principles and other key governance practices from time to time for adoption by the Board. No changes were made to our Corporate Governance Guidelines in the most recent year.

 

Our Bylaws and Corporate Governance Guidelines provide for a majority voting standard in uncontested director elections. Therefore, in uncontested director elections, a director nominee must receive more votes cast for than against his or her election in order to be elected to the Board. The Board expects a director to tender his or her resignation if he or she fails to receive the required number of votes for election or re-election.

The Company has a classified Board, with each class of directors serving 3-year terms. Our certificate of incorporation provides that, subject to any rights applicable to any then-outstanding preferred stock, the Board shall consist of such number of directors as is determined from time to time by resolution adopted by a majority of the total number of authorized directors, whether or not there are any vacancies in previously authorized directorships. Subject to any rights applicable to any then-outstanding preferred stock, any vacancies resulting from an increase in the size of the Board or otherwise must be filled by the directors then in office unless otherwise required by law or by a resolution passed by the Board. The term of office for each director will be until his or her successor is elected at an annual meeting of stockholders or his or her death, resignation, or removal, whichever is earliest to occur. Any additional directorships resulting from an increase in the size of the Board will be distributed among the three classes so that, as nearly as possible, each class will consist of one-third of the total number of directors.

 

The Board conducts a comprehensive annual self-evaluation to determine whether it and its committees are functioning effectively and to identify potential areas of improvement. The evaluation process includes written questionnaires and one-on-one interviews with each director. The Chairman shares a summary of the results with the full Board and action plans are created to address identified improvement opportunities.

 

Our Corporate Governance Guidelines provide that directors should not serve on more than four other public company boards. Directors are expected to advise the Chairman in advance of accepting an invitation to serve on another public company board or for-profit private company board and before accepting an assignment to any other public company’s audit or compensation committee. No director may serve as a director, officer, or employee of a competitor of ours.

 

Our Code of Conduct serves as the foundation for our compliance program and sets forth the ethical standards, legal requirements, and other policies we expect our directors, officers, and associates to comply with at all times. Stockholders may access a copy of our Code of Conduct in the investor relations section of our website at www.express.com/investor. We will also provide the Code of Conduct in print without charge upon request by telephone at (888) 423-2421, via email to IR@express.com or via mail delivered to the Office of the Corporate Secretary at 1 Express Drive, Columbus, OH 43230.

We will promptly disclose any waivers of our Code of Conduct involving our directors or executive officers. We intend to satisfy any disclosure requirements regarding any amendment or waiver of our Code of Conduct by posting the information on the “Corporate Governance” page of our website which can be found at www.express.com/investor.

 

Under our current Related Person Transaction policy, a “Related Person Transaction” is any transaction, arrangement, or relationship between us or any of our subsidiaries and a Related Person where the amount involved exceeds $120,000 and the Related Person has or will have a direct or indirect material interest. A “Related Person” is any of our executive officers, directors, director nominees, any stockholder beneficially owning in excess of 5% of our stock or securities exchangeable for our stock, any immediate family member of any of the foregoing persons, and any firm, corporation, or other entity in which any of the foregoing persons is an executive officer, a partner or principal, or in a similar position, or in which such person has a 5% or greater beneficial ownership interest in such entity.

 

 

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All Related Person Transactions must be approved or ratified by a majority of the disinterested directors on the Board or a designated committee thereof consisting solely of disinterested directors in accordance with our Related Person Transaction Policy. In approving any Related Person Transaction, the Board or the committee must determine that the transaction is on terms no less favorable in the aggregate than those generally available to an unaffiliated third-party under similar circumstances.

Since January 29, 2017, there has not been, and there is not currently proposed, any transaction or series of transactions to which we were or will be a party in which the amount involved exceeded or will exceed $120,000 and in which any Related Person had or will have a direct or indirect interest.

Director Compensation

 

Non-employee directors receive compensation for Board service, which is designed to fairly compensate them for their time and effort, be competitive with the market, and align their interests with the long-term interests of our stockholders. Employee directors receive no compensation for Board service. The Compensation and Governance Committee, together with its independent compensation consultant, periodically review the form and amount of director compensation and recommend changes to the Board, as appropriate. As part of its review, the Compensation and Governance Committee considers how the Company’s director compensation program compares to the programs at the peer companies we refer to in the executive compensation setting process. See “Executive Compensation—Compensation Discussion and Analysis—Executive Compensation Practices—The Role of Peer Companies and Benchmarking” beginning on page 39 for more information about our peer companies. The Compensation and Governance Committee believes that director compensation should be competitive with the market and geared towards attracting and retaining highly-qualified independent professionals to oversee the Company and represent the interests of the Company’s stockholders.

 

The annual cash retainers for our non-employee directors in 2017 are shown in the following table.

 

Non-employee directors also receive equity grants on an annual basis. In 2017, non-employee directors were granted restricted stock units that had a fair value of approximately $125,000 on the date of grant and that vest on May 15, 2018, subject to continued service. The Company’s non-employee Chairman was entitled to an additional grant of restricted stock units that had a value of approximately $40,000 on the date of grant and that vest on May 15, 2018, subject to continued service. All directors receive reimbursement for reasonable out-of-pocket expenses incurred in connection with their Board service.

 

The Board has director stock ownership guidelines which call for non-employee directors to own an amount of our common stock equal to five times their annual cash retainer. Directors have five years to meet the guidelines. Under these guidelines, directors are generally not permitted to sell any shares of our common stock until they achieve the ownership guideline and thereafter are only permitted to sell shares to the extent that such sale would not cause the director to fall below the ownership guideline. To avoid fluctuating ownership requirements, once a director has achieved the applicable stock ownership guideline, he or she is considered to have satisfied the guideline, provided that the shares used to meet the underlying requirement are retained. As of the end of fiscal 2017, all non-employee directors have met or are on track to meet the stock ownership guidelines. For a discussion of the stock ownership guidelines applicable to Mr. Kornberg, refer to “Executive Compensation—Compensation Discussion and Analysis—Executive Compensation Practices—Stock Ownership Guidelines” on page 41.

 

 

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The following table sets forth information regarding compensation earned for each of our non-employee directors in fiscal 2017.

 

 

 

 

 

 

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Executive Officers

The following table sets forth the names, ages, and titles of our executive officers as of April 16, 2018:

 

 

Our executive officers are appointed by the Board and serve until their successors have been duly elected and qualified or their earlier resignation or removal. There are no family relationships among any of our directors or executive officers.

Set forth below is a description of the background of the persons named above, other than Mr. Kornberg, whose background information is provided in “Election of Class II Directors (Proposal No. 1)” on page 9.

Matthew Moellering has served as our Executive Vice President and Chief Operating Officer since September 2011. Prior to that, he served as our Executive Vice President, Chief Administrative Officer, Chief Financial Officer, Treasurer and Secretary from October 2009 to September 2011, Senior Vice President, Chief Financial Officer, Treasurer and Secretary from July 2007 to October 2009, and our Vice President of Finance from September 2006 to July 2007. Prior to that, he served in various roles with Limited Brands (now known as L Brands) from February 2003 to September 2006, including Vice President of Financial Planning. Prior to that, Mr. Moellering served in various roles with Procter and Gamble where he was employed from July 1995 until February 2003. Prior to that he served as an officer in the United States Army. Mr. Moellering serves on the board of directors of L.L.Bean, Inc. which is a privately held company.

Colin Campbell has served as our Executive Vice President of Sourcing and Production since June 2005. Prior to that, from March 1997 to June 2005, Mr. Campbell held a number of leadership positions for various divisions of Limited Brands (now known as L Brands) including Cacique and Limited Stores and was an Executive Vice President of Western Hemisphere Operations at Mast from 2003 to 2005. Prior to that, from 1985 to 1997, Mr. Campbell was Vice President of Operations for the dress division of Liz Claiborne. He has also worked in production leadership positions with Bentwood Brothers LTD in England and Daks-Simpson LTD in Scotland.

James (“Jim”) Hilt has served as our Executive Vice President and Chief Customer Experience Officer since April 2018. Prior to that, he served as Executive Vice President, Chief Marketing Officer and eCommerce since March 2016. Mr. Hilt joined Express in February 2014 as Senior Vice President of eCommerce. Prior to joining Express, he was the Vice President of eBooks and Managing Director, International at Barnes & Noble from 2012 until February 2014. Prior to that, Mr. Hilt held several executive positions at Sears Holdings, the parent company of Sears and Kmart, including Divisional Vice President of Product Management, Divisional Vice President of Online Services, and Divisional Vice President and Director of ManageMyHome. Prior to Sears, Mr. Hilt was a Director of Global Marketing at SAP. Before joining SAP, Mr. Hilt held several senior positions at IBM. Mr. Hilt serves on the board of directors of Hibbett Sports, Inc.

John J. (“Jack”) Rafferty has served as our Executive Vice President of Planning and Allocation since 1999 after joining Express as Vice President of Planning and Allocation in 1998. Prior to joining Express, Mr. Rafferty held a number of planning and allocation leadership roles with Limited Brands (now known as L Brands). These roles included Vice President of Planning and Allocation for Lerner from 1990 to 1998, Vice President of Lane Bryant from 1988 until 1990, and Director of Planning and Allocation for Sizes Unlimited from 1984 to 1986. Mr. Rafferty started his career in various planning and allocation roles with Korvettes, Casual Corner, and Brooks Fashion.

Douglas Tilson has served as our Executive Vice President of Real Estate since October 2009. Prior to that, he served as our Senior Vice President of Real Estate from October 2007 to October 2009. Prior to that, he was with Steiner & Associates as Senior Vice President of Leasing from April 2005 until October 2007. Prior to that, Mr. Tilson was Senior Vice President of Real Estate for Tween Brands from July 1999 until April 2005 and served in a number of senior real estate positions with Limited Brands (now known as L Brands) from January 1987 until July 1999. Prior to that, he was a labor attorney with the law firm Porter, Wright, Morris & Arthur LLP from June 1984 until January 1987.

Periclis (“Perry”) Pericleous has served as our Senior Vice President, Chief Financial Officer and Treasurer since July 2015. Prior to this appointment, he held a number of other leadership positions within our finance organization, including Vice President of Finance from December 2010 to July 2015, Director of Financial Planning & Analysis from April 2010 to December 2010, and Director of Store Finance from November 2007 to April 2010. Mr. Pericleous joined Express in August 1999 and served in a variety of roles of increasing responsibility across the finance organization, including in store finance and financial reporting. He began his career in 1996, serving in various accounting roles at Drug Emporium and then Value City Department Stores. Mr. Pericleous is a Certified Public Accountant.

 

 

 

 

 

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Executive Compensation

Compensation Discussion and Analysis

 

OVERVIEW OF FISCAL 2017 BUSINESS RESULTS

Financial performance declined in 2017 on a year over year basis, however, we continued to make meaningful progress against strategic initiatives that we believe will lead to long-term value creation for our stockholders. Our e-commerce business continues to be a strength, generating record sales of over $500 million in 2017 and accounting for 24% of net sales compared to 19% in 2016. We also continued to generate strong cash flow in 2017 and ended the year with more than $235 million in cash and no debt on our balance sheet. The Company’s ability to generate cash flow beyond its investment needs led to the Board approving a capital return program for stockholders in the form of a new $150 million share repurchase program in 2017.

 

In 2017, net sales declined by $55M notwithstanding strong growth in e-commerce sales. The decline was due to lower store sales which we attribute to, among other things, decreased traffic in our stores due in part to declines in mall traffic overall. The overall net sales decrease, coupled with the promotional retail environment, led to operating margin contraction and a decline in earnings.

 

The retail sector continues to face challenges and opportunities that come from rapid change. We continue to believe in the opportunities presented by the changing dynamics in retail and our ability to generate long-term value for our stockholders through focused execution of our strategy which includes (1) improving profitability through a balanced approach to growth, (2) increasing brand awareness and elevating the customer experience, (3) transforming and leveraging information technology systems, and (4) cultivating a strong company culture.

 

 

 

 

 

 

 

 

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2017 COMPENSATION HIGHLIGHTS

Our executive compensation program is designed to strongly align executive compensation with the Company’s financial performance. In 2017:

 

 

 

 

 

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The chart below illustrates CEO actual realizable total direct compensation compared to target realizable total direct compensation for the 2015, 2016, and 2017 fiscal years. Actual realizable total direct compensation reflects the actual amount of pay our CEO can expect to receive from equity awards, including a current estimate of value for awards that have either not yet vested or have not yet been earned. For more information on CEO realizable compensation refer to “Executive Compensation—Compensation Discussion and Analysis—What We Pay and Why: Elements of Compensation—CEO Realizable Pay” on page 37.

 

CEO Realizable TDC⁽¹⁾: Target vs. Actual

For more information on 2017 CEO compensation refer to “—What We Pay And Why: Elements of Compensation” beginning on page 31 and the Summary Compensation Table on page 43.  For more information on our short-term cash incentive program refer to “—What We Pay And Why: Elements of Compensation—Performance-Based Incentives—Short-Term Incentive Program” beginning on page 32. For information on our long-term equity incentive program see “—What We Pay And Why: Elements of Compensation—Performance-Based Incentives—Long-Term Incentives” beginning on page 34.

2017 NAMED EXECUTIVE OFFICERS

This Compensation Discussion and Analysis (“CD&A”) focuses on the compensation of our named executive officers (our “NEOs”) for 2017, who are listed below:

 

 

 

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EXECUTIVE COMPENSATION OBJECTIVES AND PRACTICES

Below we highlight the core objectives that serve as the foundation for our compensation program, the practices we have implemented to achieve those objectives, and practices we have not implemented because we do not believe they would serve the Company’s long-term interests.

 

 

 

 

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Our executive compensation program is designed to strongly align executive compensation with the Company’s financial performance. The elements of our compensation program for 2017 were as follows:

 

 

 

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The Committee strives to achieve an appropriate mix between the various elements of our compensation program to meet our compensation objectives; however, it does not apply any rigid allocation formula in setting our executive compensation, and the Committee may make adjustments to this approach for various positions on a case-by-case basis as appropriate. A significant portion of executive compensation is intended to be variable and tied to the Company’s financial performance and stock price. The following charts show that, for 2017, 86% of CEO compensation and 67% of other NEO compensation at target was variable.

 

BASE SALARY

We provide a base salary to our executive officers to compensate them for their services during the year and to provide them with a stable source of income. NEO base salaries are determined by an annual assessment of a number of factors, including the individual’s current base salary, job responsibilities, peer group and other data, relevant market survey data, and individual and Company performance.

The annual base salaries in effect for each of our NEOs as of February 3, 2018 are shown in the following table:

 

 

Effective April 1, 2018, the base salary for Mr. Hilt was increased to $650,000 in connection with his promotion to Chief Customer Experience Officer. Effective March 25, 2018, the base salary of Mr. Pericleous was increased to $500,000 based on a review of Chief Financial Officer salaries for our peer group and in furtherance of our objective to pay competitively.  

PERFORMANCE-BASED INCENTIVES

Short-Term Incentive Program

Our short-term performance-based cash incentive compensation program provides our NEOs with incentive payment opportunities for each six-month operating season that corresponds to the traditional retail selling seasons of Spring (February through July) and Fall (August through January). The target short-term cash incentive compensation opportunity for each eligible executive is set at a percentage of base salary. 40% of each executive’s annual target bonus is allocated to the six-month Spring season and 60% is allocated to the six-month Fall season which is intended to align with the seasonality in our business where higher portions of our net sales and net income are typically realized in the six-month Fall season due primarily to the impact of the holiday season. The seasonal design allows us to establish appropriately challenging performance targets that align business performance expectations with the seasonal nature of the way we manage our business and prevailing market and economic conditions which can change quickly in the retail apparel sector. For example, this structure allows for mid-year development of performance targets and provides an incentive for our executives to focus on meeting goals in the six-month Fall season in circumstances when business performance and macro-economic conditions decline or improve relative to our operating plans.

2017 Short-Term Cash Incentive Compensation

 

 

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Based on a competitive review and peer group practices as well as the importance of achieving various strategic initiatives, in 2017, we modified our seasonal short-term performance-based cash incentive compensation program to include an operational goal in addition to a financial performance goal. For each season, 75% of the target payout opportunity was based on a financial performance goal while 25% was based on an operational goal.

Financial Performance Goal (75% Weighting). The financial performance goals under the short-term cash incentive program for 2017 were based on operating income, subject to adjustments for certain extraordinary items. We continue to use operating income as a financial performance goal because it is a performance measure over which executives can have significant impact, and is also directly linked to the Company’s seasonal operating plans and long-range plan. The financial goal continues to have a threshold, target, and maximum payout which allows participating executives to double the incentive payout associated with achievement of the financial goal if the maximum operating income goal is achieved.

The only adjustment made to operating income in 2017 was for the purpose of excluding expense associated with the Company’s closure of its Canadian business which is consistent with adjustments reflected in supplemental non-GAAP financial information publicly reported by the Company. The Company provides supplemental non-GAAP financial information to exclude non-core operating items that may not be indicative of, or are unrelated to, our underlying operating results and that we believe provide a better baseline for analyzing trends.  See Appendix A for adjustments made for non-core operating items in 2017 for purposes of determining whether the performance targets had been achieved.

Operational Performance Goal (25% Weighting). The operational performance goals under the short-term cash incentive program for 2017 were tied to cost savings initiatives, subject to a minimum performance hurdle of $50M in Adjusted EBITDA in each season which was intended to ensure that any compensation would be treated as performance-based under Section 162(m) of the Code. The operational goal is binary and pays out at target only if the cost savings initiative and the minimum performance hurdle is achieved.

The Committee sets the performance goals near the beginning of each six-month season based on an analysis of (i) historical performance, (ii) internal financial plans, (iii) strategic objectives, and (iv) general economic conditions.

Both financial and operational performance goals are set at the same targets for all leadership in the business. We believe it is important to have all members of leadership working towards the same goals and that those goals are clear, understandable, and within their control.

For 2017, the amount of performance-based cash incentive opportunity for participating executives ranged from zero to 175% of their incentive target, based upon the extent to which the performance goals were achieved. The threshold, target, and maximum short-term performance-based cash incentive payout opportunities for our NEOs for 2017 are set forth in the “Grants of Plan-Based Awards” table on page 45.

The target cash incentive compensation opportunity as a percentage of base salary in effect for each of our NEOs for 2017 is shown below:

 

Final payout amounts for each six-month season are approved by the Committee at its first regularly scheduled in-person Committee meeting following the end of each six-month operating season and are paid out to executives after such approval.

Spring Season (40% weighting). The following table illustrates the performance goals and actual payout levels for the six-month Spring season. Based on the Company’s performance, no amounts were paid to our NEOs under the Company’s seasonal short-term cash incentive program for the 2017 Spring season.

 

 

 

 

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Fall Season (60% weighting). The following tables illustrate the performance goals and actual payout levels for the six-month Fall season. Based on the Company’s performance, the operating income goal paid out below target and the operational goal paid out at target under the Company’s seasonal short-term cash incentive program for the 2017 Fall season.

 

 

2018 Short-Term Cash Incentive Compensation

In 2018, we expect to continue with our seasonal short-term cash incentive compensation program with 75% of the target payout opportunity based on financial goals and 25% based on operational goals. For 2018, we expect to use adjusted operating income as the financial performance metric. We expect the operational goal for 2018 to be tied to various strategic goals, including cost saving goals, omni-channel goals, store optimization goals, and sustainability goals, with all goals required to be achieved in order for there to be a payout on account of the operational goal.

Target cash incentive compensation opportunity as a percentage of base salary is expected to remain the same for each NEO in 2018, except for Mr. Hilt whose incentive compensation opportunity for 2018 was increased to 65% in connection with his promotion to Chief Customer Experience Officer.

Long-Term Incentives

For 2017, the Committee and Board determined that our NEOs would receive a mix of long-term equity incentives comprised of the following:

 

 

 

Our long-term equity incentive awards are generally intended to accomplish the following main objectives: (1) create a direct correlation between the Company’s financial performance and stock price and compensation paid to our NEOs; (2) retention of our NEOs; (3) assist in building equity ownership of our NEOs to increase alignment with long-term stockholder interests; (4) attract and motivate key associates; (5) reward participants for performance in relation to the creation of stockholder value; and (6) deliver competitive levels of compensation consistent with our compensation objectives. The total grant date fair value of awards for our NEOs are determined on a position-by-position basis using market data for corresponding positions in our peer group and other relevant market survey data, the individual’s job responsibilities, and individual performance.

Executives are generally granted equity-based awards as part of our annual merit review process. During this process, the Committee determines the appropriate overall value and mix of equity-based grants for our NEOs. For more information on our executive compensation practices, including the annual merit review process and the objectives and factors considered by the

 

 

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Committee as part of the executive compensation decision making process, see “—Executive Compensation Practices—“Determining Compensation for the CEO” and “Determining Compensation for the Other NEOs” beginning on page 39.

2017 Stock Options

In 2017, the Company granted our NEOs the non-qualified stock options set forth in the Grants of Plan Based Awards table on page 45. One-fourth of the stock options are scheduled to vest on each of April 15, 2018, 2019, 2020, and 2021, subject to continued employment with the Company.

The exercise price for stock options is set at the most recent closing trading price prior to the grant date. Options vest over multiple years and are exercisable for ten years after grant, which furthers stockholder alignment by encouraging a focus on long-term growth and stock performance.

2017 Time-Based Restricted Stock Units

In 2017, the Company granted our NEOs the time-based restricted stock units set forth in the Grants of Plan Based Awards table on page 45. One-fourth of the restricted stock units are scheduled to vest on each of April 15, 2018, 2019, 2020, and 2021, subject to continued employment with the Company.

Performance-Based Restricted Stock Units

Beginning in 2015, the Committee and Board determined that performance-based restricted stock units granted to our NEOs would be subject to three-year Adjusted EPS performance goals. Each multi-year Adjusted EPS performance goal is assigned a threshold goal, target goal, and a maximum goal. To better align with market practices, in 2016, the Committee modified the threshold and maximum payout levels for the Company’s performance-based restricted stock units. The updated payout structure became effective for grants of performance-based restricted stock units granted in 2016.

The number of performance-based restricted stock units that vest is determined using straight line interpolation if Adjusted EPS over the performance period is an amount between performance goals. No portion of performance-based restricted stock units are payable in the event the Company fails to achieve the threshold Adjusted EPS goal. The table below shows the payout and vesting status of the performance-based restricted stock units granted in each of 2015, 2016, and 2017.

 

For grant and vesting purposes, “Adjusted EPS” means the Company’s diluted earnings per share calculated in accordance with GAAP, adjusted to exclude the impact of any non-core operating costs consistent with past practice for debt extinguishment and one-time transaction costs. The Company provides supplemental non-GAAP financial information to exclude non-core operating items that may not be indicative of, or are unrelated to, our underlying operating results and that we believe provide a better baseline for analyzing trends.  Refer to Appendix A for more information on Adjusted EPS, a non-GAAP measure, and a reconciliation of Adjusted EPS for 2015, 2016, and 2017 to reported EPS, the most directly comparable GAAP measure.

2017 Performance-Based Restricted Stock Units

In 2017, the Company granted our NEOs the performance-based restricted stock units set forth in the Grants of Plan Based Awards table on page 45 that have performance goals based on Adjusted EPS measured over a three-year performance period commencing on the first day of the Company’s 2017 fiscal year and ending on the last day of the Company’s 2019 fiscal year. Any performance-based restricted stock units that are earned based on the achievement of performance goals are scheduled to vest in April 2020.

 

 

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The following chart identifies the performance metric, performance levels, the performance levels as a percentage of the target goal, and corresponding payouts as a percentage of the target performance-based restricted stock unit grant for the Company’s performance-based restricted stock unit awards granted in 2017.

 

Adjusted EPS was $0.36 in 2017. Cumulative Adjusted EPS in 2018 and 2019 must equal at least $1.58 in order for the 2017 performance-based restricted stock units to pay out at the threshold level.  

2016 Performance-Based Restricted Stock Units

In 2016, the Company granted our NEOs performance-based restricted stock units that were subject to performance goals based on Adjusted EPS measured over a three-year performance period commencing on the first day of the Company’s 2016 fiscal year and ending on the last day of the Company’s 2018 fiscal year. Any performance-based restricted stock units that are earned based on the achievement of performance goals are scheduled to vest in April 2019.

The following chart identifies the performance metric, performance levels, the performance levels as a percentage of the target goal, and corresponding payouts as a percentage of the target performance-based restricted stock unit grant for the Company’s performance-based restricted stock unit awards granted in 2016.

 

The three-year cumulative Adjusted EPS target goal was based on the Company’s strong Adjusted EPS performance in 2015 of $1.45. Adjusted EPS was $0.81 in 2016 and $0.36 in 2017. Adjusted EPS must equal at least $3.37 in 2018 in order for the 2016 performance-based restricted stock units to pay out at the threshold level.

2015 Performance-Based Restricted Stock Units

In 2015, our NEOs, excluding Mr. Pericleous who was not CFO at the time, were granted performance-based restricted stock units that were subject to performance goals based on the Company’s Adjusted EPS measured over the three-year period commencing on the first day of the Company’s 2015 fiscal year and ending on the last day of the Company’s 2017 fiscal year. The performance-based restricted stock units that were earned based on the achievement of performance goals vested in April 2018.

The following chart identifies the performance metric, performance levels, the performance levels as a percentage of the target goal, and corresponding payouts as a percentage of the target performance-based restricted stock unit grant for the Company’s performance-based restricted stock unit awards granted in 2015.

 

The following table shows the performance metric, performance levels, the performance levels as a percentage of the target goal, actual performance goals, and the actual percentage of performance-based restricted stock units that were earned based upon achievement of the performance goals.

 

2018 Long-Term Equity Incentive Compensation

The elements and design of our compensation program will remain the same in 2018, except that we are making changes to our long-term incentive program which we believe will better accomplish our goal of retaining and motivating our executive talent while the Company continues its multi-year transformation to an omni-channel retailer. For 2018, the long-term incentive packages for our executives will be comprised of 25% performance-based restricted stock units, 25% long-term performance-based cash

 

 

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incentives, and 50% time-based restricted stock units. The financial goals for the performance-based stock units and performance-based cash incentives will be the same and will require achievement of challenging 3-year Adjusted EPS goals. The awards will also include a total shareholder return (“TSR”) modifier such that payouts may be increased or decreased based on Company TSR performance relative to TSR of the Dow Jones U.S. Retail Apparel Index. The long-term incentive program in 2018 will continue to have 50% of its award value dependent on the achievement of challenging performance targets, consistent with our pay-for-performance philosophy, but will now deliver half of the value in the form of equity and half in the form of cash which helps us better manage share usage and overhang. We elected not to award stock options in 2018 and instead award equivalent value in the form of time-based restricted stock units because we believe that the time-based restricted stock units currently serve as a better retention tool during this period of rapid change in the retail sector and while the Company is executing its multi-year transformational strategy to become a leading omni-channel retailer. We also considered that the use of stock options is not prevalent amongst our peer group and that awarding restricted stock units is favorable with respect to share usage and overhang.  

CEO REALIZABLE PAY

The following chart shows realizable total direct compensation (“TDC”) at target and actual for Mr. Kornberg in 2015, 2016, and 2017. For 2015, 2016, and 2017, the chart details the significant difference between realizable TDC at target versus actual realizable TDC, which further illustrates the rigor of our performance targets which serve to strongly align CEO pay with the Company’s financial performance.

Realizable TDC is comprised of base salary, short-term cash incentives, and long-term equity incentives (“LTI”). Actual realizable TDC is intended to measure the actual amount of pay Mr. Kornberg can expect to receive from his base salary and performance-based compensation awards. Actual realizable TDC consists of base salary plus actual cash bonus payouts and the actual amount of pay delivered from equity awards including a current estimate of value for awards that have either not yet vested or have not yet been earned. Realizable TDC is supplemental information and should not be considered a substitute for information in the Summary Compensation Table on page 43.

For 2015, 2016, and 2017, actual realizable TDC varied significantly from the total compensation reported in the Summary Compensation Table because the Summary Compensation Table requires the inclusion of the grant date fair value of the performance-based restricted stock units granted to Mr. Kornberg at target, even though Mr. Kornberg only earned approximately 75% of the performance-based restricted stock units granted to him in 2015, is not expected to earn any of the 2016 performance-based restricted stock units, and is currently expected to earn only 80% of the performance-based restricted stock units granted in 2017. The Company’s financial performance will need to significantly improve in order for the 2017 performance-based restricted stock units to vest.

Furthermore, the Summary Compensation Table reports the grant date fair value of stock options as calculated in accordance with GAAP, while actual realizable TDC reflects any amounts actually received by the CEO through the exercise of stock options plus the estimated fair value of outstanding and unexercised stock options as of fiscal year end.