Summary
- Express, Inc. finds itself in distress as sales decline and the company keeps reporting net losses.
- Over the past five years, the company has lost around 86% of its market value.
- The recent deal with WHP Global aims to provide the company with cash necessary for its survival.
Thesis
The clothing retail industry is one of the most competitive in the consumer discretionary sectors with changing trends and a large number of companies fighting for market share. Express, Inc. ( EXPR ) is a company that finds itself in distress in the current market environment with negative growth and lack of profitability. In this analysis I explore the company's financial situation while examining the recently completed deal with WHP Global, aiming to essentially rescue the business.
Devastating Stock Price Declines
Over the past five years, EXPR has lost over 85% of its market value. 2022 marked yet another terrible year for the stock, as it recorded a -76% loss. Negative sales growth and a number of operating struggles have led investors to doubt the survivability of the company over the mid-term. EXPR is also heavily shorted (10% short position in the market).
Looking into the Business
Founded in 1980, Express, Inc. is an American clothes and accessories retailer. The company aims to provide consumers with affordable, trendy everyday clothing, through more than 500 stores across the U.S., Puerto Rico and Latin America, including outlet stores. Outside the United States, Express maintains 2 stores in Puerto Rico, 2 in Panama, 1 in El Salvador and 1 in Guatemala.
Express also maintains a significant e-commerce, direct-to-consumer sales channel. Clothing lines for men and women include denim, jackets and coats, dresses, suits, shirts and more. The company's products are sourced primarily outside of the United States through arrangements with approximately 70 vendors and by utilizing around 270 manufacturing facilities located mostly in Asia. Express currently employs around 10,000 people (full-time and part-time).
For the 2021 fiscal year that ended in January 2022, merchandise sales were comprised of 91% apparel and 9% accessories, while 57% of sales regarded women's collections and 43% men's. Outlet stores currently account for 28% of total sales.
Revenue growth has been non-existent over the past years, with revenue decreasing from $2.16B in 2018 to $1.87B in 2022. Even though Gross Margins have remained above 30% over the past 5-years, the company seems unable to control its SG&A expenses, that are destroying any chance of sustaining bottom life profitability.
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For the 2021 fiscal year the company reported positive cash flow from operations of $89M, and cash from investing of $41M leaving some room for positive free cash flow. However, for the trailing 12 months, Express has generated -$85M in cash from operations, showing once again financial deterioration.
While the company's struggles to grow, the inventory balance keeps increasing, from $268M in 2019 to $423M as of the last quarterly filling. This increase indicates poor inventory management, deteriorates the company's cash generating ability and leads to the company incurring additional storage and liquidation costs. Express also displays a current ratio below one, despite growing inventory, indicating liquidity problems.
Recent Results Undershoot Again
The company posted its Q3 2022 results in December 8, continuing to disappoint. Net sales decreased QoQ from $472M to $434M. EBITDA came in at $-14.5M, while gross margins retreated as well. SG&A expenses also increased by $10M further hurting the profitability outlook. Interest expenses rose more than 50% compared to the same quarter last year. EPS came in at $-0.50 compared to $0.19 last year. Overall, Q3 results delivered more concerns and raised more pessimism for the company. For 2022 and 2023 fiscal years analysts expect flat sales and net losses to continue.
The Silver Lining: The WHP Global Deal
At the end of January, Express management announced that it completed its transaction with brand management firm WHP Global, that was initially made public in December 2022. EXP and WHP will form a joint venture that is expected to drive growth through the acquisition and operation of a portfolio of brands. Newly issued shares of EXPR will be acquired by WHP at $4.60. More specifically, according to Seeking Alpha :
WHP will make a $25M common equity PIPE investment to acquire 5.4M newly issued Express shares at $4.60 per share, representing a pro forma ownership of about 7.4%. The joint venture is valued at ~$400M, with WHP committing $235M for 60% ownership and EXPR contributing certain intellectual property for the remaining 40% stake.
A large proportion of the proceeds raised will be used by management to pay off debt ($90M) and fund the company's first year royalties obligations ($60M) to the joint venture. Potential, future acquisition opportunities could also be exploited with some of the deal proceeds. It remains unclear, however, how the deal will affect the major growth and profitability issues the company is faces.
More Generalized Risk Factors
Despite the major inherent risks the company is facing, given its concerning profitability and growth struggles, it is also exposed to a number of industry/economic risks, a few of the most important are briefly discussed below.
- Cyclicality: Clothing retailers fall into the consumer discretionary sector and as such sales are sensitive to consumer spending changes as economic condition change. Recessionary periods and inflationary pressures can adversely affect sales and profitability
- Competition: The clothing industry is extremely competitive and highly fragmented across the United States and the World. As a result, the company's market share is under continuous threat, while growth in revenues is hard to achieve. Intense competition also places downward pressure on profit margins.
- Cost Inflation: Input materials (textiles, fabrics) used in clothing manufacturing are subject to price increases as the world sees elevated inflation. Increasing labor costs also carry a negative impact to the company's profitability.
Final Thoughts
Despite the recent positive development regarding the WHP Global transaction, Express will have to fix systemic problems in terms of profitability and sales growth in order to start regaining investors' trust. Of course for a company in distress like Express a nosebleed valuation is a given and does not in isolation deem the stock attractive. For now, it is my view that EXPR stock should be avoided unless one is looking for a very risky bet on low expectations.
For further details see:
Express, Inc: A Very Unsafe Bet With A Silver Lining