Seeking Alpha
, Dillon Wiley (11 clicks)
Contrarian, growth, value, special situations
Profile| Send Message|
( followers)  

Summary

  • EXPR announced this weekend it would be extinguishing the remainder of its long-term debt which should bring to an end its capital restructuring.
  • This, combined with the opening of 2 new flagship stores should help drive up net income.
  • EXPR is currently trading at $16.30 based on its recent depressed earnings, but management has positioned itself to capitalize on long-term growth.

There was a time where Express (NYSE:EXPR) was the go-to place for the young twenty-something to start their professional wardrobe. However, as the fickle tastes of their target audience changes, Express has so far failed to keep up. But is there hope for Express to reclaim its dominance in the minds of young men and women for affordable business attire?

Income Statement

Rising COGS combined with unimpressive revenue growth has led to a sharp decline in gross profit, the effects of which can be seen trickling down to the bottom line where growth in net income has become stagnant. So, what has kept Express from drifting in to the red? In a word: interest expense.

To counteract their decaying profit margins, Express has honed in on tweaking its capital structure. Over the weekend, Express announced the extinguishing of the remainder of its total outstanding long-term debt which will have a significant effect on future earnings as interest expense is taken out of its expenses.

Balance Sheet

Cash is on the rise, and inventories are piling up while non-current liabilities continue to fall. If management sits around and lets it continue, this company could fall hard and fast. However, given the management team's proactive reduction of their long-term liabilities, they seem to be freeing themselves up for a dramatic shift in operations.

Cash Flows

While the income statement paints a fairly grim picture, the cash flow statement seems to be the silver lining for Express. Increasing operating cash flow and free cash flow paints the picture of a company on the mend; especially considering how much of the cash flow is attributed to paying down debt, and even repurchasing some of its own stock. Once Express has settled on its overhaul of its capital structure, cash flows will gravitate back towards operations and opening new stores.

Strategy

Express's plan to open 2 new flagship stores as well as several others in malls around the world will help boost the brick-and-mortar revenue which has been weighing down gross profit the past two years. Additionally, Express has increased its marketing budget for its eCommerce store which has quickly become a significant portion of revenue (12% and climbing as of the last 10-K) which should have an significant impact on gross profit. This combined with the extinguishing of its outstanding debt should prove to be very favorable on future earnings.

Bottom Line

While Express has been stagnant the past couple of years, I believe management is taking the right actions to build long-term growth. A declining debt-to-equity ratio and ramped up store openings (including 2 flagship stores, one of which is the newly opened store in Times Square) will start to show in Return on Equity.

Express seems poised to emerge from it's current depression, and would make a great addition to a long-term growth portfolio.

Source: Express Inc. Poised To Grow