|Shares Out. (in M):||89||P/E||9.8x||0.0x|
|Market Cap (in $M):||1,341||P/FCF||0.0x||0.0x|
|Net Debt (in $M):||96||EBIT||0||0|
Express Inc. (NYSE: EXPR) has had a bumpy year with the stock getting crushed twice in the last year, losing 27% and 22% respectively in May 22, 2012 and October 2, 2012 on back of investor jitters from missed analyst forecasts.
The Company has since then made some good management changes and has emphasized on its go-to-market strategy, which has been very successful in the men’s segment.
While my long thesis has run some course in the last month and half, I believe there is an additional 40% upside potential considering:
(i) The stock is cheaply valued relative to peers: Currently trading at 4.4x EV/ EBITDA vs. median EV/EBITDA comparable company multiple of 5.7x. This is despite Express having the best EBITDA margins and huge potential to grow its EBIDTA number.
(ii) Huge growth potential via new stores addition in US and internationally: Potential to add up to 200 stores in US alone. New and remodeled stores are being opened in their new store format which is trendier, easier to shop and elevates sale of accessories.
Additionally, Canada is another huge opportunity for growth. Currently, Express has only 7 stores outside US and Canada but is focused on expanding in the international arena.
(iii) Accessories business: Currently, accessories business is a small portion of sales. Lately, the Company has been focusing on increasing products offered in high margin products like shoes, watches, perfumes and jewelry. While its too early to estimate sales in this segment, Company has a good opportunity to increase its bottomline from sales in this segment.
(iv) New leadership and better marketing strategies: The emphasis on go-to-market strategy should help improve margins and improve inventory management. The opening of its two flagship store in San Francisco and New York in fall 2013 should help better promote the brand.
Business Overview and Brief History: Express is one of the largest specialty retailers (FY11 ~US$2.1bn sales) offering apparel and accessories to men and women, targeting primarily 20 to 30 year old customers. The company distinguishes itself from other retailers by offering multiple lifestyle occasions at an attractive value addressing fashion across work, casual, jeanswear, and going-out occasions. On average, revenue mix is 35% men and 65% women.
The Company was launched 30 years ago as a division of Limited Brands. In 2007, the company transitioned to a stand-alone company after it was bought-out by Golden Gate Private Equity in 2007. The Company went public 3 years later in May 2010, when the Company raised $272 million by selling 16 million shares at $17.00 each IPO price
Valuation: Express is undervalued compared to its immediate peers despite having better EBITDA margins, ability to grow by adding new stores, and potential to increase store productivity (revenue per sq ft). Additionally, unlike other retailers like ARO, ANF, GPS and Banana Republic, Express offers fashion across work, casual, jeanswear, and going-out occasions, which we think provides an attractive market and growth opportunities.
|Ticker||Name||Mkt. Cap||Enterprise Value||Sales (LTM)||EBITDA (LTM)||EV / LTM Sales||EV / LTM EBITDA||Revenue Per Sq ft||# Stores||Gross Margins||EBITDA Margins|
|ANF||ABERCROMBIE & FITCH||$3,784.0||$3,538.9||$4,371.0||$506.8||0.8x||7.0x||$562.0||1,067||60.6%||11.6%|
|AEO||AMERICAN EAGLE OUTFITTER||$3,976.4||$3,431.7||$3,411.9||$471.6||1.0x||7.3x||$541.6||1,063||35.7%||13.8%|
|BEBE||BEBE STORES INC||$337.6||$158.8||$521.7||$32.9||0.3x||4.8x||$521.1||250||39.8%||6.3%|
|Source: Bloomberg, CapitalIQ and Company Financials.|
At LTM EBIDTA of $314mm (which is actually below potential 2012 EBIDTA due to problems with Knit Tops segment and low traffic due to bad marketing strategies in Q1 and Q2) and applying median EV/EBIDTA comparable company multiple of 5.7x, the stock is worth ~$19.0, implying 30% discount to share price of $14.59 as of Jan 2, 2013.
LTM EBITDA: $314mm
Median Multiple: 5.7x
Enterprise Value: $1789.8mm
Net Debt: $96.4mm
Market Cap: $1,693.4
Shares Outstanding: 88.9
Share Price: $19.05
Current Share Price: $14.59
In addition to the above valuation, Express can increase its current EBITDA through:
1) EBIDTA margin improvements: In the next 3-5 years, the Company has stated on earnings call that they foresee room for approx. 200bps of margin expansion through its re-focused go-to-market testing strategy. Also, the Company believes that there is some leverage on the SG&A side with current infrastructure good enough to handle growth opportunities. Additionally, the Company is focused on extension of high margin accessories via introduction on shoes, watches and perfumes.
Go-to-market testing strategy focuses on early season testing and managing timing on purchases and production to reduce exposure to changes in specific styles and trends. Currently, the Company conducts testing on approx. 75% of its new products (20% pre-2007) that it introduces in stores. This has allowed it to reduce randomness / wastage out, improve margins, reduce mark-downs and lower its inventory risk.
The Company has been consolidating its separate women's and men's store into combined dual-gender stores (currently 5% of its stores are still separate). Further consolidation and closing on non-performing store should help reduce duplicate cost and improve margins.
2) E-commerce: Since 2008 (post the acquisition by Golden Gate), the online business has grown rapidly to account for ~10% of sales. The company is bringing the online platform in house this fall, which will allow it to take-control and be more responsive to customers. Ecommerce sale is currently lower than industry average (approx. 15%). Growth in ecommerce sales should help reduce cost and increase margins.
3) New stores: Company has identified~250 additional potential new store locations. Current plan is to add approx. 30 new stores per year in US and Canada. Express has stated that they will open two flagship stores in New York and San Francisco in Fall 2013, which should help in promoting brand.
Conservatively, if we assume 10 new stores per year, EBITDA should increase by 3-4% per year.
4) International Expansion: The Company is selectively exploring opportunities in Latin America, Asia, Europe and Middle East. The Company has recently set up a dedicated team to focus on international expansion and increase awareness of its brand name. The Company anticipates international sales to be a $600 million opportunity over the long term. We think the company is in its early stages of international expansion with a good potential to increase EBITDA, but I would not put too much weight into this for now.
5) Leadership change: David Kornberg has been recently promoted to President with responsibility for both the men's and women's merchandising and design functions. David has a long history with the firm and had been instrumental in changing the men's side of the business efficiently utilizing the go-to-marketing strategy.
Additionally, the Company has been opportunistically been buying stock in the open market under its current $100 million share repurchase program. As of Oct 2012, the Company had purchased about $65.1 million worth of shares at an average price of $16.38 per share.
In conclusion, given that stock is trading at a discount to its peers with multiple avenues for growth, I would expect stock to move back to around the $20.0 mark or ~30% higher than the current share price.