Earlier this week, we hosted Express management including CFO Perry Pericleousand Vice President, Investor Relations Mark Rupe for investor meetings in theMidwest. We walked away with a greater appreciation of the company’s rapidlygrowing digital business, real estate flexibility, strong balance sheet, and steppedup efforts on the merchandise and marketing front. With 1Q18 representingEXPR's first positive comp in 2 years, a supportive apparel backdrop QTD, andcheap relative valuation (on EV/EBITDA) we are tempted to be more constructiveof the stock, however, numerous headwinds still persist including a negativemargin mix shift with in-store traffic still down, promotional activity skewing upYOY, a high hurdle to leverage SG&A (MSD-HSD SSS) due to wage inflation,increased marketing spend, and incentive comp (post two years without it), andinitiatives such as BOPIS and newness in the assortment like men’s performanceshirts still in the very early innings. We reiterate our Hold rating and $10 PT.
Turning the Corner Post Prior Challenges?
2015 was a very solid year for EXPR with strong top- and bottom-line growth,however, trends deteriorated in 2016 post a few strategic missteps, including apullback in promotional activity (as peers deepened activity), a ~20% increase inchoice count (that reduced depth of inventory of key SKUs), and marketing thatfocused on a younger customer. These challenges have largely been correctedand 1Q18 represented the company’s first positive comp (up 1%) in two years.Comp drivers going forward include newness in assortment such as men’sperformance shirts and women’s denim perfect jeans, the rollout of expandedsizes for men’s and women’s online and in 130 stores, increased transactionsdriven by the revamped NEXT loyalty program, continued strength in men’s suitson the back of the highly successful NBA marketing campaign, positive trends inoutlet doors, and robust online growth.
More Than Catching Up Online