Summary
- Express has been facing a number of headwinds as consumers pull back on apparel spending.
- The WPH Global deal improves its balance sheet and gives it some options, but WPH is the real winner.
- At around $1, EXPR shares are basically a call option on a turnaround at this point.
WHP Global is the real winner in its deal with Express ( EXPR ) given its IP JV, even though it overpaid for its stake in EXPR. However, the battered fashion retailer could still be worth a speculative bet.
Company Profile
EXPR is a fashion apparel retailer that sells women's and men's clothes, accessories, and related merchandise. The majority of its items are created by its in-house design team.
Over 90% of its sales are of apparel, while under 10% is accessories. Women’s apparel represented 57% of sales in FY2022, with Men’s the remaining 43%.
The company sells its apparel brand both online and through its own stores. Its stores are primarily located in shopping malls, lifestyle centers, outlet centers, and street locations. At the end of October, it had 351 retail stores and 202 outlet stores. Retail stores and e-commerce accounted for 72% of its sales through the first 9 months of FY23.
The company launched the UpWest brand in 2019. UpWest is positioned as a lifestyle brand focused on comfort, offering casualwear, loungewear, and pajamas. The brand has 14 stores and a wholesale agreement with Nordstorm ( JWN ).
Its items are generally manufactured in Asia. The company says it uses 70 vendors utilizing approximately 270 manufacturing facilities across 20 counties.
EXPR also offers a private label credit card through Comenity Bank. The bank owns the credit card accounts and Alliance Data Systems services the customers.
Opportunities
EXPR’s biggest opportunities center around acquiring additional brands, licensing, and international expansion.
In January, the company entered into a strategic partnership with global brand management firm WHP Global. Together the companies are expected to pursue acquisitions to expand EXPR's brand portfolio. The company believes that its omni-channel platform can help drive cost savings and margin expansion of an acquired company.
As part of the agreement, WHP made a $25 million common equity PIPE investment in EXPR, taking a 7.4% ownership stake. The newly issued EXPR shares were issued at $4.60. EXPR received $260 million in gross proceeds from the sale.
The two firms also formed an intellectual property [IP] joint venture intended to “scale the Express brand through new domestic category licensing and international expansion opportunities.” WHP will own 60% of the JV, with EXPR owning the other 40%.
Commenting on the deal on its Q3 call , EXPR CEO Tim Baxter said:
“We have entered into a mutually transformative strategic partnership with WHP Global, a leading brand management firm to advance our Express Way Forward strategy, scale our Express brand and accelerate the growth of our company through brand acquisitions. Through this partnership, we begin a bold new chapter, one that we expect will drive greater shareholder value. Let me talk you through the key components of this partnership. First, we will leverage our fully integrated omnichannel platform and operating expertise to acquire, operate and grow multiple fashion brands. Second, we will establish an intellectual property joint venture with WHP to scale the Express brand through category and global licensing expansion. And third, we will immediately strengthen our balance sheet with $260 million in gross proceeds from the WHP investment. When combined, we expect these components will lead to accelerated long-term profitable growth and increase shareholder value.”
On the acquisition front, the company could buy a smaller brand that doesn’t have a huge online presence, take out corporate costs and integrate into it online infrastructure. EXPR also likely would have better sourcing scale that could help on the cost front.
On the licensing front, the company plans to pursue opportunities to license its brand with international partners and in non-core categories. This is a common strategy among brands that will license its name to things such as fragrances, shoes, and eyewear. WHP is considered a licensing expert.
The company could also license its stores to international partners. This is an inexpensive way to get into foreign markets, and using its brand awareness to generate additional revenue through royalty fees. An international licensee should also know local markets and trends better.
Perhaps, the biggest benefit of the agreement, though, is that it strengthens EXPR's weak balance sheet through WHP's cash infusion. The company had over $230 million in debt at the end of Q3 and was burning cash, which is not a good combination for a retailer.
Risks
Despite the WPH deal, EXPR still faces a lot of risks. While the agreement gives the company a cash infusion, if it’s going to make an acquisition, it’s likely going to have to be in cash. Or the company could dilute shareholders through an equity offering to pay for it. Given its current stock price and current interest rates, neither is a great option.
EXPR also is looking at some poor results in FY22, despite flat comps. The company noted a challenging macro environment and a highly promotional environment with deep discounts when it slightly lowered the mid-point of its full year guidance in January. It now expects a full-year EPS loss of -$1.18 to -$1.22 versus a prior forecast of -$1.12 to -$1.22.
The macro environment, meanwhile, may just continue to get worse, as the Fed continues to hike rates and tech companies lay off workers. If the U.S. goes into recession, it won’t be good for a company like EXPR.
EXPR also faces fashion risk, and it does have a history of not always being on trend. In Q3, the company admitted that it had some misses in its women business that impacted results. Management has previously said that there would always be some misses with fashion, but that it has a lot of hits as well.
Inventory issues are another risk, and EXPR had nearly $40 million more in inventory at the end of FY023 than it did at the same period last year. Of course, elevated inventory leads to more discounted selling and margin pressure.
It’s also worth noting the with its new JV, the company has to pay the JV a royalty rate based on its net sales. It will pay a rate of 3.25% for the first five years and 3.5% thereafter. It will get distributions back (40%), but WHP looks like it has the better end of the deal here.
Conclusion
While billed as a transformative deal, the WPH agreement doesn’t solve all of EXPR’s issues, and perhaps none of them. The IP deal heavily favors WHP, which will net about 2% (60% of 3.25-3.5%) of EXPR’s $2 billion in revenue, or $40 million, every year even if it doesn’t add a single international partner or other opportunity. The $40 million, meanwhile, wipes out the $30 million in SG&A and $10 million in interest payments EXPR was looking to save on in FY24.
An acquisition, meanwhile, doesn’t seem to make much sense for current shareholders given the cost that it would take to make it – either putting the balance sheet back in stress or diluting shareholders. And any deal that would be accretive would likely have to be another brand in some distress that would need help getting fixed.
Outside of 2020, EXPR has been solidly FCF before 2022. However, it's burned through $119 million in cash through its first three quarters of FY23. With the cash infusion, it will have net cash of just above $50 million and Q4s are typically FCF positive. As such, the company likely as a couple years to right the ship and get back to FCF positive. Lower sales and higher SG&A have been the main culprits for this shift. High-margin royalty payments from its deal with WPH would certainly help to improve its FCF profile.
If the company can return to FCF positive like in the past before the pandemic, then it could go up 5-10x its current price. If it continues to flounder and burn cash, it could be $0.
If you’re a gambler, the risk-reward is favorable enough to make a small bet on EXPR stock.
For further details see:
Express Is Now Basically A Long-Dated Call Option