EXPR - A New CEO At Express Inc. - But It May Not Be Enough To Save The Fashion Retailer

2023-09-10 09:00:00 ET

Summary

• CEO Tim Baxter is out and is being replaced by Stewart Glendinning from Tyson Foods.
• Express lost $11.29 per share in the latest quarter.
• A new $65 million FILO loan with an interest rate of SOFR+10% was announced on September 6.
• Express could be hurt by the new student loan repayment requirement.

Fashion retailer Express ( EXPR ) stock plunged after their recent 1 for 20 reverse stock split, so it comes as no surprise that their CEO Tim Baxter is being replaced effective September 15. The new CEO is Stewart Glendinning from Tyson Foods ( TSN ). Their latest loss per share was $11.79 and the full year management guidance is for a staggering loss per share of $30.00 - $34.00 , which compares to a stock price of only $8.46. EBITDA for the latest quarter was a negative $24.696 million compared to a positive $25.565 million in the prior year, and their operations burned up $60.8 million in cash for the first half of the year. Even with a new CEO, I don't see any significant improvement in the future, and I continue to rate EXPR stock a sell.

Express Is Still a Billion-Dollar Company

Before looking at the current situation, it is important to briefly look at their past. The equity market capitalization of Express was greater than their annual revenue in 2012. Last year, their revenue was $1.86 billion, which makes them still a major specialty fashion retailer. Their current extremely low market equity capitalization, however, of just over $30 million, puts Express into a micro-cap classification group that is often not even covered by Seeking Alpha published articles.

Baxter is Gone - New CEO

According to a press release on September 7, Tim Baxter was replaced as CEO by Stewart Glendinning. The fact Baxter is gone is no surprise given the disastrous results of the last few years. The problem, in my opinion, is that Glendinning does not have experience in the fashion retail industry. His background is mostly in the food industry at Tyson Foods ((TSN)) and Molson Coors ( TAP ). He moved to Tyson Foods from Molson Coors as CFO in February 2018, but was replaced last October as CFO by John Tyson, son of the chairman. Glendinning stepped down from CFO "to transition to the role of Group President, Prepared Foods."

Glendinning was paid $4.438 million last year at Tyson. Tim Baxter was paid a total of $7,717,586 last year, which was up from $6,951,730 the prior year. Glendinning has a BBA from the College of William and Mary and law degree from the University of Miami.

There is limited information about Glendinning, but perhaps the board selected him because they were impressed with his managerial skills that offsets his lack of fashion retail background. Express board member Peter Swinburn, who was former CEO of Molson Coors, may have been the major force behind this. A strong dynamic manager with a creative, but also efficient, mindset is needed at Express to restructure their business model, in my opinion, and his CFO background is critical for Express given their current distressed financial position. If he is successful, it could be dramatic because Express is at such a low point currently. The reality, however, is Express is a huge ship that is difficult to turn - it is not some small kayak.

New FILO Loan Avoids Possible Going Concern Warning

Their recent 10-Q report did not include a required ASU No. 2014-15 (subtopic 205-40) "going concern" statement by management because they were able to negotiate new additional financing of $65 million, in my opinion. Even their 10-Q stated, "management believes that cash flows from operations, together with the proceeds from the new FILO Term Loan Facility... will result in adequate cash flows to support the Company’s ongoing operations and to meet its obligations as they become due under the agreements governing its indebtedness for at least one year following the date these interim financial statements are issued". This and other statements in their 10-Q seem to imply, in my opinion, that without that new loan they may not have been able to meet their obligations over the next year.

This new $65 million FILO term loan is not cheap - SOFR+10%, which is currently 15.31% (5.31%+10%). It has a second lien on assets. The cash is being used "to paydown outstanding borrowings under the ABL Credit Agreement without corresponding commitment reductions". Why use cash from a 15.31% loan to pay the ABL facility that has a much lower interest rate of SOFR+1.75%-2.25%? It seems that they had to because of a ABL covenant requires a minimum of $25 million or 10% of ABL loan cap (currently 10% of $290 million or $29 million), availability. They had a total availability of approximately $47.5 million as of July 29. After subtracting $29 million (10% of $290 million) from $47.5 million, it seems that actually only $18.5 million was effectively available as of July 29. Assuming that they are needing cash to finance operations/inventory for the going-back- to-school and the holiday seasons, I would expect that Express already used much, if not all, of that $18.5 million when they received cash under the new FILO loan to partially paydown the ABL revolver.

Express was willing, in my opinion, to pay the high interest rate to avoid the potential of a going concern statement because vendors (actually vendor's bankers) often become much stricter with their terms when dealing with customers who have filed a going concern warning in their 10-Q. This would be especially problematic for Express just before the busy holiday season.

Still Burning Cash

The problem is, this new loan is just a "band aide". Express continues to burn cash. During the first 26 weeks of this fiscal year, they burned up $60.8 million and last fiscal year they burned up $157 million. Much of the 243 million cash received from the deal with WHP was used to paydown debt, but long-term debt has already increased over $100 million this year to about $221 million as of July 29 and that was before the new FILO loan deal. In addition, I consider the minimum royalty payments to be effectively interest rate expenses. The first year minimum of $60 million was prepaid for this year, but what about next year? Where are they going to get the cash to pay this? (I covered this issue in detail in my prior article .)

The critical $52.3 million CARES Act receivable that is carried in the non-current section of their balance sheet is not really getting enough attention. Management stated during the conference call that they "expect to receive a $52 million CARES Act refund in the back half of the year". Why is it taking three years to get? I could not find a GAAP rule about carrying this specific receivable on a balance sheet. This is a very "old" receivable. I wish there was some extensive coverage of this because it could really help Express if they get it soon, but if they do not actually receive it this year, Express could be in a very serious cash problem starting next year. Management also promised during the conference call huge cost-cutting measures will help cash flow, but I always wait to see the actual results of these promises.

With Baxter gone, it will be interesting to see what the new CEO plans to do to cut costs. I expect a large number of store closings, but it takes cash to close stores and cancel leases because of potential lease cure costs. Store closing also means inventory liquidation, which too often is at a loss.

Latest 2Q Results

Consolidated sales that include the recently acquired Bonobos declined 6% from last year. Without Bonobos, their sales were down 14%. What makes these results look even worse was that inflation was about 4% during that period, and the economy was not in a recession. What happened to WHP Global? I thought they were somehow going to help promote and expand the Express brand that they bought. I don't see any impact.

Income Statement 2Q and 6 Months 2023 and 2022

Management's Guidance Numbers

Their guidance for the 3Q is for a loss per share of $5.50 - $7.50, which would be a major improvement from a loss of $11.79 per share in 2Q. This implies a loss per share of $37.12 to $39.12 for the 9 months ($31.62 loss per share for first half of the year plus loss of $5.50 - $7.50). Their guidance of loss per share of $30 - $34 for the year seems irrational, in my opinion, because it would imply an income per share of between $3.12 and $9.12 in 4Q.

While 4Q includes the busy holiday season, I just do not see such a sharp improvement, especially because I worry that their primary target market of educated 20–35-year-old consumers is also the same group that is now being required to start paying their student loans again. This is not some minor issue. It could have drastic negative impact of fashion retailers such as Express. I think these former students may purchase fewer items and become more price sensitive. Express is fashion oriented and not a "bargain" store, which means Express could get hit hard. It will be interesting to see their 4Q and next year's 1Q numbers.

Conclusion

With Tim Baxter finally out as CEO there could be a positive market reaction, but I don't see how the new CEO, Stewart Glendinning, can turn this retailer around fast enough because his background is not in the fashion industry, which is very different than the food industry.

Their latest results were poor, and just don't see how they can cut enough expenses to get cash moving from negative to positive fast enough to avoid some future loan default. Large royalty payments next year could make it even more difficult to become cash flow positive.

Without payment of the CARES Act receivable soon, I just don't see how they can continue to operate under their current business model. Because of all these negatives and uncertainties, I continue to rate EXPR stock a sell.

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