Express Files for Chapter 11: Private Equity, Shifting Retail Landscape, and Unfair Import Laws Blamed

Express was once the dominant force in mall shopping but now joins the growing list of mega-retailers filing for bankruptcy. The company cites several factors contributing to its downfall, including missteps in merchandising and the challenging retail landscape. Fingers are also being pointed at the role private equity played in Express’s decline and loopholes in import regulations that favor rising Chinese fast fashion brands.

Private Equity’s Acquisition

Express was acquired by private equity firm L Catterton in 2010 for a reported $3.1 billion. This leveraged buyout left Express saddled with a heavy debt load. Express’s debt-to-equity ratio ballooned to over 4.0 after the acquisition, compared to a healthier ratio closer to 1.0.

This increase Express’s interest expenses and limits a company’s financial flexibility. In Express’s case, the high debt burden may have:

  • Limited Investment in Growth: The need to service the debt likely diverted resources away from crucial investments in areas like e-commerce infrastructure, store renovations, and modernizing their product offerings.
  • Reduced Ability to Weather Downturns: High debt makes a company more vulnerable to economic downturns or unexpected challenges. When the retail landscape shifted, Express may not have had the financial buffer to adapt effectively.
  • Eroded Profit Margins: The significant interest payments resulting from the heavy debt load ate into Express’s profit margins, making it harder to compete on price with other fast fashion brands.

Retail Landscape and Chinese Competition

The rise of e-commerce giants like Amazon and Shein has significantly impacted traditional brick-and-mortar retailers. Express, heavily reliant on physical stores, struggled to compete with the more efficient retail strategies that resulted in lower prices for the competition. Express’s merchandising strategy, particularly in women’s clothing, appears to have fallen out of sync with customer preferences leaving them vulnerable to brands like Zara and more nimble brands.

Uneven Playing Field: Import Duties and Loopholes

Adding fuel to the fire are unfair import regulations. Express, like many American companies, sources garments from overseas manufacturers. However, online retailers like Shein often exploit a legal loophole known as the “de minimis” rule to circumvent import duties, significantly lowering their cost of goods.

  • The De Minimis Loophole: In the U.S., the de minimis rule exempts shipments valued under $800 from duties and certain taxes. This means individual packages from Shein, usually containing a few low-cost items, can enter the country without the company paying import duties. In contrast, traditional American retailers like Express, often importing larger shipments, are subject to these fees.
  • Exploiting the System: Shein strategically keeps its individual shipments under the $800 threshold, effectively breaking down larger orders into smaller packages. This allows the company to significantly reduce costs, giving them a massive price advantage over competitors.
  • Calls for Legislative Change: Critics argue the de minimis rule is outdated and doesn’t reflect the realities of modern e-commerce. Bills like the “Fair Trade in Fashion Act” aim to close this loophole, ensuring all companies, regardless of sales model or country of origin, play by the same rules. Unfortunately, such legislation has yet to gain enough traction to pass.

The current system creates an unfair playing field, disadvantaging traditional American retailers who face higher costs due to import regulations. This imbalance threatens domestic jobs and makes it incredibly difficult for companies like Express to compete based solely on price.

The Road Ahead

Express is currently seeking a buyer while in Chapter 11 bankruptcy. A consortium led by brand management firm WHP Global has expressed interest, with plans to revitalize the brand. Whether Express can successfully navigate these choppy waters remains to be seen. The company’s future hinges on a combination of factors – a successful acquisition, strategic changes to adapt to the retail landscape, and fairer import regulations.