Heavy Pressure On Express (EXPR): Do Not Get Burnt Here

Express (NYSE:EXPR) remains a specialty retailer that is a very volatile stock and ideal for trading for rapid-return gains. As investors, you need to be careful because the long-term outlook is not looking promising based on the performance of the company. Today’s rally has seen traders pocket some very fast cash but we think our traders who may have entered on this rally need to be taking profit here. Long-term investors should avoid this entirely unless they have a mindset of the investment being a highly speculative, lottery ticket type investment. While shorts are covering, the company is still operationally in some trouble.

Now make no mistake, it has been a horrible market and a horrible time for retail stocks largely. However, EXPR stock, while up very nicely today, is likely to give gains back when the rally fades. In the specialty retail space, it is those who are best managing their inventory, using tactical promotion, and watching costs that are doing well in this environment. Inflation has been a contributor to retail pain. Look, you have rising input costs coupled with a consumer whose dollar does not go as far anymore. Folks this is a bad mix for retailers. We think the most recent earnings are painful, and show that the retailer, while working to survive, is still in trouble. While specialty retail is a very competitive sector, Express suffers further from being a money loser, burning cash, and being heavily shorted. The stock has had a run, but we think you take your trading gains now if you have them. We think the stock will resume its downward path, especially if we get the recession we have been predicting.

Performance discussion

So Express has been a winner today but a loser the last few months. It is a former ‘meme stock.’ We think the momentum today will falter in the next session or two. The just reported earnings were very mixed, with a lot of weakness, and some bright spots. The company whiffed versus consensus estimates on the top line, while losing much more money on the bottom line than expected, missing consensus by over 70%. Ouch. Earnings were significantly worse than expected overall.

The top line revenue figure in the Q3 report showed year-over-year declines in sales. Now look, it has been a struggle for many in the retail space this year as inflation has run rampant, but fashion is back. It is highly competitive but Express seems to be losing market share based on its declining sales performance. It is our belief that based on the trends we are seeing for the company, the stock will perform quite poorly after this rally. Sure, you may get another day of covering or so, but there is nothing in this report that will stem the decline in shares. The company is bleeding money here. Sales came in at $434 million and fell 9.0%, exemplifying the weakness.

The one key metric that we focus on with retailers is comparable sales. Comparable store net sales also fell 8.0% from comparable store net sales for the prior year’s Q3. Online sales remain strong for many retailers, but not this one. Online sales cratered 17% from a year ago, while brick and mortar was also down 6%. While that was poor, year-to-date performance is a disaster. Folks, through 2022 the company has operating cash flow of negative $96 million. That is terrible, especially when last year, when the stock was still single digits but had positive cash flow through the first 3 quarters of $78.3 million. This retailer is in trouble base on these trends.

Why is it so bad? Well like many other companies there is an inventory problem. They simply have “too much stuff” to put it in lay terms. Inventory was up 10% from last year to $422 million. They need to move that merchandise and the only way to do it is to be super promotional, and that crushes margins. Speaking of which, there was margin contraction here, yet another poor sign. Profit is what matter folks. Gross profit fell badly this quarter to $120 million, falling from $157 million a year ago. Margins themselves were crimped badly as gross margin declined to 27.8% from 33.2%.

Really, higher expenses after all this?

Here is the kicker. All of this bad news on sales declines, bad comps, inventory, and this company managed to increase general expenses to $150 million versus $141 million a year ago. That needs to change immediately or the company will bleed out more. Even Capex is up this year, $24.3 million through three quarters while it was $18.1 million a year ago. This is a big red flag. And because there is a lot of debt here, the company saw its interest expense nearly double from last year to $4.7 million. Everywhere we look it is bad news.

Net losses were quite high, as the company lost $34.4 million, or $0.50 per share. This was a decline from a year ago where the company had $0.13 per share in income.

The valuation of the stock is a bit of a trap as it looks good on trailing price to sales, but keep in mind, performance is slipping and losses are expected this year and next. There is just no growth here, or very limited. Ultimately, you get what you pay for.

In our opinion this is a lottery ticket. It could payoff huge if the company clears its inventory issues and figures out how to seriously rein in spending while paying its debt, but most importantly, it seems to us the retailer is losing market share to money-making competition. As we look ahead for the rest of 2022, we think the cash position is dwindling. At the end of the quarter, cash and equivalents totaled $25 million after they burnt about $12 million in cash in Q3. They only have $47 million left on their credit facility, and have $231 million in long-term debt, as well as $5 million in short-term liabilities.

Why the rally?

So why is the stock rallying? It was not the forward guidance, which was poor. They see for the year flat comps, margins down 150 basis points, and losses of $1.17 per share at the midpoint. However, the one mildly bullish point here is that the company has made moves to secure more financing on an expanded revolver and did some refinancing of some of its exiting term loan facility which buys them some time.

The rally we think is driven in part by today’s news of a strategic partnership with WHP Global. This shakes things up and shows the company is making real moves to try and improve, but we think the rally is going to be short-lived. You can read more about that here, but the high lever view is that they are doing a joint venture on some portfolio brands. WHIP will also invest $25 million to Express and get 5.4 million new shares (valued at $4.60). We think this is the reason shares are rallying, but keep in mind that this is dilutive. That said, it is a positive for operations. However, we think you sell this rally, as we expect shares to reverse course once again.

Take home

It was a bad quarter. The guidance is weak. There is short covering on the news due to a new partnership with WHP Global, but the company is in real operational trouble here. Competition is mighty and Express still has a tough inventory issue. As we expect a weak stock market in early 2023, this stock will likely head back toward $1 in short order. We recommend avoiding this name, with the exception of speculative lottery ticket type trades.