Express (EXPR)

mall

Key Statistics

Enterprise Value = $239.42 million

Operating Income = $57.54 million

EV/Operating Income = 4.16x

Price/Revenue = .16x

Earnings Yield = 10.64%

Debt/Equity = 10%

The Company

Express is a mall apparel retailer and is hated. It is down 81% from its all-time highs and down 63% from its 52-week high. It was hammered particularly hard during the November/December tantrum. Unlike most stocks, it didn’t recover from that. The CEO also stepped down in January.

Sales and earnings have been steadily declining for the last few years, which has led to an extremely negative reaction in the stock. Earnings have fallen from $1.38 in 2016 to $.25 in 2018.

Express’s target market is 20-30 year old men and women. Categories cover casual wear and work wear. It has established a niche in this area. They currently operate 635 stores, including 145 outlet stores. They design their own clothes, which also adds to their unique niche.

My Take

The expectations embedded in the price indicate that most investors expect this company to die. The question I try to answer when looking at situations is simple: will this company be a going concern in 5 years?

Looking at Express, I think this company will continue to exist in 5 years and will continue to be profitable. They are pursuing some initiatives to transform the current climate and sustain themselves while mall retail is decline. I think their niche focus on 20-somethings is critical here. When we think about the retail establishments that will survive, I believe that generic retail establishments that try to sell products to everyone are going to have a tougher time than retail establishments with a consistent, loyal niche. Retailers that have established themselves with a unique niche that inspires customer loyalty are likely to survive the shakeout. Express is doing this by laser focusing on young people and designing their own unique clothes.

Express is also taking steps to combat the decline of mall retail. They now offer ship-from-store, allowing their customers to order clothing directly from a nearby store and have it shipped to them. This entrenches its online brand and fights against declining mall traffic. Currently, online orders represent 24% of total sales for Express, and this is increasing.

As they expand their online presence, Express also shows a willingness to close underperforming stores when leases expire. This is a sharp contrast to the Francesca’s debacle I invested in over a year ago, a company which was opening new stores even as their existing chains struggled. Express, in contrast, closed stores and is moving them from malls to more traffic-friendly outlet locations. In 2017, they closed 45 mall locations and opened 24 outlet locations.

The financial position of Express also increases the odds that the turnaround strategy will eventually yield results. Currently, they have an extremely low debt to equity ratio of 10%. The F-Score of 8 also represents an extremely high degree of financial quality. The Z-Score is also 3.44, meaning that the company has an extremely low bankrtupcy risk. This strong financial position gives Express something critical: time. They have the time to weather the storm while other, less well-positioned retailers, are wiped out.

Investors are getting paid for the uncertainty. The P/E of 9.4 compares to an industry average of 17.10. In the last 5 years, the average P/E for Express has been 19. On a price/sales basis, the current ratio of .16 compares to an industry average of .5. On an enterprise multiple basis, the current value of 4.16x compares to a 5-year average of 6.9.

Overall, Express is a troubled retailer with an uncertain future. However, I think that investors are being paid for the uncertainty because the consensus expectation is that Express will not survive at all. Meanwhile, management is aggressively pursuing a turnaround strategy. If the plan actually works, Express should trade at a significantly higher multiple in the future. Trading at half of book value and around double cash value, I think this limits the risks on the downside.

PLEASE NOTE: The information provided on this site is not financial advice and it is for informational and discussion purposes only. Do your own homework. Full disclosure: my current holdings.  Read the full disclaimer.