One of the cheapest stocks in our All Investable Screener, which you can subscribe to here, is Express, Inc. (NYSE:EXPR).
Express Inc. is a specialty apparel and accessories retailer of women’s and men’s merchandise, targeting the 20 to 30-year-old customer. Express has more than 35 years of experience offering a distinct combination of fashion and quality for multiple lifestyle occasions at an attractive value addressing fashion needs across work, casual, jeanswear, and going-out occasions.
The company currently operates more than 650 retail and factory outlet stores, located primarily in high-traffic shopping malls, lifestyle centers, and street locations across the United States, Canada, and Puerto Rico. Express merchandise is also available at franchise locations in Latin America and the Middle East. Express also markets and sells its products through its e-commerce website, www.express.com, as well as on its mobile app.
As you can see below, the company’s share price has been smashed in the past twelve months, down 33.29% from $17.33 on December 21, 2015 and down 46% from $21.39 on April 1 this year to its latest closing price of $11.59.
(Source: Google Finance)
Start with the Balance Sheet
In order to find the true value of a company, as Bruce Greenwald always says, start with the balance sheet and ignore DCF. So let’s do that for Express Inc. A quick look at the company’s latest balance sheet (below) for Q3, 2016 shows that it has $102 million in cash and cash equivalents and zero debt at October 29, 2016. Companies with strong balance sheets are exactly the types of stocks we’re looking for as value investors.
|Quarterly Balance Sheet (values in thousands)|
|Cash and Cash Equivalents||$101,855||$119,564||$111,033||$186,903|
|Total Current Assets||513,285||449,788||459,459||$513,419|
What’s not shown above is that inventory at the end of the third quarter totaled $342 million representing a 6% decrease over the previous year. The company’s retail business inventory decreased by 5% as it remains focused on its open to buy processes to ensure that its level of inventory is appropriate for its sale trends.
Now, having a strong balance sheet is one thing, let’s take a look at the statement of cashflows for Express Inc for the trailing twelve months (below).
|Quarterly Cashflow Statement (values in thousands)|
|Cash Flows-Operating Activities|
|Net Cash Flow-Operating||$13,715||$61,810||-$15,661||$173,970|
|Cash Flows-Investing Activities|
|Net Cash Flows-Investing||-$30,545||-$42,262||-$18,247||-$30,330|
|Cash Flows-Financing Activities|
|Sale and Purchase of Stock||$32||-$10,011||-$38,824||-$46,543|
|Other Financing Activities||-$95||-$63||-$4,340||-$50|
|Net Cash Flows-Financing||-$464||-$10,470||-$43,553||-$46,964|
|Effect of Exchange Rate||-$415||-$547||$1,591||-$988|
|Net Cash Flow||-$17,709||$8,531||-$75,870||$95,688|
First, we can see that the company has a total of $264 million in operating cashflows (TTM) and $111 million in capex (TTM). That means Express Inc has $153 million in free cashflow (TTM).
Second, what does the company do with that free cashflow? As with all great capital allocators, Express Inc buys back shares when they’re priced at a discount and continues to pay down debt. As the share price is falling Express Inc has spent $95 million on share repurchases (TTM) while maintaining zero debt. These are the type of shareholder friendly companies that we’re looking for.
Rectifying its Mistakes
Express Inc made some poor decisions in Q2, 2016 which impacted its results however, here’s what CEO David Kornberg had to say about rectifying those issues in his latest Q3 2016 Results – Earnings Call Transcript.
“Now turning to the issues I defined in Q2. As you may recall, in addition to more traffic headwinds, we mentioned there were three key issues that negatively impacted our performance this past spring. Namely, we skewed too young in our projection, both in our marketing and merchandizing.”
“We had a lack of clarity in our assortment caused by too many choices and we reduced customer touch points compared to last year. I’m pleased to say we are making progress on all fronts. We have taken steps to address the issues we identified in our merchandizing and marketing projection.”
“Our presentation of fall will closely be [ph] in line with our target demographic driving improvements in important brand metric such as familiarity and purchase consideration. We are on-track with our objective to reduce choice counts in the fourth quarter and to be at optimal levels as we begin 2017.”
“We believe the choices that make up our fourth quarter assortment clearly identify, curate [ph] and communicate the important trends. This will be further enhanced with spring delivery. Going forward, we will continue to deliver frequent units but we will tell fewer fashion stories in store to ensure our offerings are clear and cohesive across lifestyles.”
E-Commerce the Bright Spot
It has to be said that Express Inc finally has it right with its E-commerce offering.
E-commerce was the bright spot in the latest Q3 quarter delivering 15% growth as the company capitalized on the increasing preference of its customer demographic towards this channel with a strong and clear marketing and merchandizing message.
During the quarter, the company also launched several key initiatives including improved navigation, as well as continued optimization for its search and category changes.
Retail Fleet Rationalization
In terms of new stores, the company opened five new Express factory outlet locations during the quarter bringing the total to 99. During the next quarter, the company intends to open four additional stores and convert one existing retail store. This should keep Express Inc on-track to end 2016 with 104 Express factory locations and ensure it reaches its target of 140 to 150 stores within the next few years.
Express Inc also continues to make progress in its retail fleet rationalization initiative, closing 42 stores since the beginning of 2015 and having one additional closure planned for the fourth quarter, leaving it just seven shy of its target of 50.
The company has made significant efforts to increase its brand awareness and elevate customer experience through the use of social media. Its Express Instagram Channels are continuing to build on following and engagement with more than 600,000 followers across the channels.
While the company appears to be making all the right noises, in terms of its outlook, CFO Perry Pericleous had this to say:
“Lastly in terms of guidance, our capital expenditures are now expected to range from $100 million to $105 million driven by new outlet stores and our IT platform. These — the $10 million dollar reduction versus our initial capital spending guidance at the beginning of the year. We also plan to take aggressive step to further lower our capital expenditures run rate next year. These actions are consistent with our laser focus on reducing spending in all facets of our business.”
For me, Express Inc offers lots of upside. The company has clearly been oversold trading at just 12% higher than its 52 week low of $10.37 and 46% lower than its 52 week high of 21.57.
This is a company with a strong balance sheet and solid free cash flow. It appears to have learnt from the mistakes of Q2, 2016 and it continues to focus on E-commerce, social media and retail fleet rationalization initiatives to suit its desired demographic.
In terms of valuation the company is cheap on all metrics. Its currently selling on a P/E of 10 a P/B of 1.53, a P/S of 0.44 and my favorite an Acquirer’s Multiple of 5.21 enterprise value/operating earnings. The company also has a FCF/EV yield of 15% and a buyback yield of 3%.
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