EXPR - Express

[constructive]

Express is a mall-based clothing retailer mainly aimed at 20 - 30 year olds. It has slumped below its 2010 IPO price and trades at 10.5x earnings.

 

Earnings the last few quarters have been weak (consistent with the rest of the industry) but I think they can get back on track. I see them as similar to a young Gap, less exposed to fashion risks than casual teen stores (ANF, AEO, ARO, etc).

 

They earn reasonably good ROA/ROE. The balance sheet is clean and growing, and they have also been buying back shares. Express was formerly owned by Limited Brands and then Golden Gate Capital, and could be an acquisition target again.

 

Personally I've bought clothes there, but only when they're on sale I think. That is a potential risk, that once you condition your customers to big discounts your pricing strategy and margins get more constrained over time.

 

http://www.express.com/

[PatientCheetah]

Averaging around $150mm FCF business, so you are paying about 8x normalized FCF. Good inventory and cash management, cash flow positive but some debts. It will be a fabulous buy if it can drop to 6x. On a side note, I would imagine most investors only buy clothes that are on sales solely based on principle.

[constructive]

On a side note, I would imagine most investors only buy clothes that are on sales solely based on principle.

 

You're right, I might not be a representative customer.

 

But it seems like they have more frequent sales with larger discounts than the Gap. I might occasionally buy clothes at full price at the Gap or Banana Republic, but not at Express. It seems like they're trying to sell Gap clothes at BR prices.

 

Management perspective on their challenges:

 

The holiday was extremely promotional and we worked hard for our share of the business in the face of disappointing mall traffic.

 

First quarter guidance we issued this morning reflects the fact that we have seen a significant decline in our business since the quarter began. I want to stress that we expect a sequential pick up in our business during the subsequent three quarters.

 

The third issue, we make the promotional cadence which has lead to a kind of customer fatigue. During the fourth quarter we ran all store 40 to 50 percent off sales quite a bit more than in 2012 and also quite a bit more than originally planned.

 

In terms of the women business, its decline so far this year has been steeper than the decline in traffic.

 

But there are positives too, online and international growth, decent inventory management, men's clothing has performed well, etc.

 

http://seekingalpha.com/article/2084163-express-ceo-discusses-q4-2013-results-earnings-call-transcript

[constructive]

Q1 was disappointing and the stock has continued to decline. I like management's commentary as they seem to offer a fair assessment of their challenges and opportunities. In contrast, some retailers like GMAN, BODY etc seem to have their head in the sand.

 

http://seekingalpha.com/article/2245253-express-expr-ceo-michael-weiss-on-q1-2014-results-earnings-call-transcript?part=single

 

• Our first quarter sales fell 10% to $461 million due to a decline in traffic, AUR and transactions.
  
• our April comp was up high-single digits.
  
• E-commerce sales this quarter declined 2% compared to the prior year.
  
• We anticipate 2014 net income ranging from $63 million to $76 million, and diluted earnings per share within a range of $0.74 to $0.90.
  
• Our women's business delivered weaker results than men's, which we attribute to the lack of differentiation and newness in certain key areas such as women's knit tops, sweaters and working bottoms.
  
• Our outlet store launch is off to a strong start. We are moving up our opening timetable and now anticipate that by year-end, we can have approximately 35 outlet stores open.
  
• This is 100% made for outlet by a totally -- the outlet team is totally separate, separate stores team, separate merchant, separate everything.
  
• On the international front, we opened 1 new franchise store in Mexico, ending the quarter with 26 franchise stores.
  
• After careful assessment, we are taking steps to reduce corporate expenses and eliminate certain discretionary items. In total, these actions represent approximately $18 million of annualized savings.
  
• we identified 50 stores that we now plan to close over the next 3 years as their leases expire
  
• we plan to utilize our strong balance sheet for the benefit of our shareholders with a new $100 million share repurchase program.
  

[PatientCheetah]

The whole retailing complex is interesting from a contrarian point of view. Even for the distressed retailers, there is a huge shift from BM to online. This is evident from the double digit growth in online comps and double digit decline in same store comps. The right strategy for retailers should be closing any unprofitable physical locations and continue to trim them overtime, and prioritizing both online marketing and infrastructure investments. These retailers are getting hit both from declining physical store productivity and higher expense due to online investments. People still need to buy cloth but they will buy them from different channels. I think mean reversion is highly likely. The future looks bleak for lower tier malls - how do we profit from this?

 

IMO BODY is going under - too late, not enough cash. EXPR, ANF, and AEO appear to be safe, have ample liquidity, and inventories/cash burns seem manageable. ARO (hugely derisked due the Sycamore line of credits, not sure why the market doesn't view this more favorably) and WTSL have higher risks and, at this point, should be viewed as options of a retail turnaround in the 2H.

 

Anyone else has any thoughts?

[constructive]

The whole retailing complex is interesting from a contrarian point of view. Even for the distressed retailers, there is a huge shift from BM to online. This is evident from the double digit growth in online comps and double digit decline in same store comps. The right strategy for retailers should be closing any unprofitable physical locations and continue to trim them overtime, and prioritizing both online marketing and infrastructure investments.

 

I agree. Express is at 18% online and growing, so they are actually way ahead of the curve. I don't know any other mall retailers that are even at half that. (Other than Apple.)

[fisch777]

Fashion risk is unforgiving in this business.  As said, they seem to be fairly good operators and generate decent returns, but it's all about nailing the season's trend.  EXPR tries to mitigate this risk running some flash inventory tests before they do big production runs, but it is tough.  If I recall, in 2012, they missed a sweater trend and the shares were down ~20% overnight.  Inditex (Zara) would be the gold standard to model, but this would require enormous infrastructure.

[CorpRaider]

The whole retailing complex is interesting from a contrarian point of view. Even for the distressed retailers, there is a huge shift from BM to online. This is evident from the double digit growth in online comps and double digit decline in same store comps. The right strategy for retailers should be closing any unprofitable physical locations and continue to trim them overtime, and prioritizing both online marketing and infrastructure investments. These retailers are getting hit both from declining physical store productivity and higher expense due to online investments. People still need to buy cloth but they will buy them from different channels. I think mean reversion is highly likely. The future looks bleak for lower tier malls - how do we profit from this?

 

IMO BODY is going under - too late, not enough cash. EXPR, ANF, and AEO appear to be safe, have ample liquidity, and inventories/cash burns seem manageable. ARO (hugely derisked due the Sycamore line of credits, not sure why the market doesn't view this more favorably) and WTSL have higher risks and, at this point, should be viewed as options of a retail turnaround in the 2H.

 

Anyone else has any thoughts?

 

Agree with your general thesis.  Also note the institution of POS sales tax collection on Amazon, I believe, could eventually work to reduce some of amazon's pressure on the group.  Also, at some point they may decide to try and operate for profit.  I'm thinking chiefly about picking up BBBY on the theory that it is less amazonable because the of the bridal registry business and furnishings exposure.

 

 

[PatientCheetah]

The whole retailing complex is interesting from a contrarian point of view. Even for the distressed retailers, there is a huge shift from BM to online. This is evident from the double digit growth in online comps and double digit decline in same store comps. The right strategy for retailers should be closing any unprofitable physical locations and continue to trim them overtime, and prioritizing both online marketing and infrastructure investments. These retailers are getting hit both from declining physical store productivity and higher expense due to online investments. People still need to buy cloth but they will buy them from different channels. I think mean reversion is highly likely. The future looks bleak for lower tier malls - how do we profit from this?

 

IMO BODY is going under - too late, not enough cash. EXPR, ANF, and AEO appear to be safe, have ample liquidity, and inventories/cash burns seem manageable. ARO (hugely derisked due the Sycamore line of credits, not sure why the market doesn't view this more favorably) and WTSL have higher risks and, at this point, should be viewed as options of a retail turnaround in the 2H.

 

Anyone else has any thoughts?

 

Agree with your general thesis.  Also note the institution of POS sales tax collection on Amazon, I believe, could eventually work to reduce some of amazon's pressure on the group.  Also, at some point they may decide to try and operate for profit.  I'm thinking chiefly about picking up BBBY on the theory that it is less amazonable because the of the bridal registry business and furnishings exposure.

 

A good portion of BBBY's merchandise is less amazonable. BBBY has good historical ROIC and is a owner operator company. I am not sure how much small appliances it sells, those are easily amazonable. Its historical results from the last few years were inflated due to Keurig machines and the liquidation of linens and things. I would try to normalize and figure out the reasonable expectation.

 

http://www.businessinsider.com/the-future-of-retail-2014-slide-deck-sai-2014-3

[CorpRaider]

True, but if you buy it elsewhere it doesn't come off the registry.  Gotta' love a business where the person making the purchasing decision isn't the one who is paying.  It's almost as juicy as being a healthcare provider (until recently).  BBBY also hasn't had the joy of experiencing a decent housing formation number now that they emerged victorious from the thunderdome.  I will shut up now so as not to thread-jack and you guys can go back to discussing the skinny jeans and narrow ties.

[constructive]

I will shut up now so as not to thread-jack and you guys can go back to discussing the skinny jeans and narrow ties.

 

Hey, I don't mind. I actually own some BBBY and haven't pulled the trigger on EXPR.

[CorpRaider]

Kudos on the good idea.  Hope you bought a ton.

[fareastwarriors]

Express Channeling J. Crew Implies at Least 67% Buyout Premium

 

 

http://www.bloomberg.com/news/2014-06-13/express-channleing-j-crew-implies-67-buyout-premium.html

[shamelesscloner]

What do folks think about the new CEO of Express and potential turnaround story?