Express Yourself With This Retailer
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Express (NYSE: EXPR) is a specialty retailer that developed its concept early and stayed with it for the past 30 years. Its concept is apparel and accessories for 20-30 year old men and women. Its customers shop at Express for work, casual wear, and evening occasions. Express has approximately 620 retail locations in the U.S., Canada, and Puerto Rico. The company also has additional franchised locations in Latin America and the Middle East. Express also has a thriving e-commerce business.
First quarter results
Net sales grew 3% in the first quarter to $508.5 million. The biggest driver in sales was on the e-commerce side. In the first quarter of last year, e-commerce sales grew 28% to $47.9 million, while this year online sales increased 48% to $70.7 million.
However, increased promotional activity hurt margins and profits. Gross margin fell to 33.6% compared to 38.1% last year. Net income fell to $32.4 million from $42.1 million in the prior year.
Shares got a boost after the report because the company raised its outlook for the second quarter. Comparable sales are expected to rise in the mid-single digits. Net income is expected to be $15 million-$18 million in the second quarter. Net income in last year's second quarter was $15.8 million.
Express has made great progress with its Canadian stores and looks set to see continued improvement. Canada is an attractive market for retailers because it's similar to the U.S. Express has been able to grow comparable store sales in the double-digits, partly because the company has been able to achieve parity pricing with the U.S. both in stores and online. Now, when Canadian customers calculate the exchange rate, they see that items are priced the same as those in the U.S.
Besides similar pricing in its stores and online, Express has worked with its shipping partners to get Canadian customers the same costs for online orders. The strategy behind these initiatives is to build a better relationship with Canadian customers, allowing them to see that they are getting the same deals as U.S. customers.
Outside of Canada, Express is looking to expand into new markets with new franchises. Its current franchises plan to open between 13 and 16 new stores this year. Currently, Express has no presence in Europe or Asia. While it's clear that this area could be a tremendous opportunity for Express, so far no definitive strategy has been put forth by the company.
Another route for growth that Express is developing is in the outlet space. Express just hired a new Vice President to handle strategy and a comprehensive business plan for this new venture. Outlet stores can help drive further growth in the U.S. and allow the company to get rid of excess inventory to make way for new collections in its main stores.
Finally, the company is firing on all cylinders in e-commerce. The company has done a great job with its e-commerce business and the results speak for themselves, with a 48% rise in online sales in the first quarter. The company offers free shipping on orders over $125 to encourage customers to spend more. The best part is that the company offers existing store items online, as well items as that aren't available in stores to encourage online shopping. The idea behind this is that stores have space constraints, whereas the distribution facilities for online shipping don't. This allows the company to provide a unique experience for its online shoppers.
Two chief competitors to Express are Abercrombie & Fitch (NYSE: ANF) and American Eagle Outfitters (NYSE: AEO). Abercrombie & Fitch specializes in casual apparel for men, women, and children. The company operates approximately 1,050 stores in the U.S. and internationally. American Eagle Outfitters targets 15-25 year old men and women with its apparel, and girls under its Aerie store brand.
The downside to both Abercrombie & Fitch and American Eagle Outfitters is that they both cater to the teen demographic more than Express. Express targets 20-30 year olds with higher quality and slightly pricier apparel. Express has, in my opinion, a more stable business than either Abercrombie & Fitch or American Eagle Outfitters.
The weakness in the teen demographic became evident when Abercrombie & Fitch reported weak first quarter earnings results. In the first quarter, net sales were down 9% from last year and comparable store sales fell 17% as well. Instead of expansion, the company is actually closing 40-50 stores this year.
American Eagle Outfitters followed suit and cut its outlook for the year. The company cited price wars for the slowdown in its business. American Eagle Outfitters said that it will now earn $0.10 per share, compared to prior guidance of $0.19-$0.21 per share for the second quarter.
The problems at Abercrombie & Fitch and American Eagle Outfitters don't appear to be affecting Express. The company's price target was just raised by analysts at Bank of America/Merrill Lynch from $24 to $26. The company remains attractively priced with a PEG ratio of 1.01 and a forward P/E of 12. The enterprise value/EBITDA comes in at 6.28. The company has $244 million in cash and only $198 million in debt.
I wouldn't recommend purchasing shares of Abercrombie & Fitch or American Eagle Outfitters at this time. The price wars look set to continue, and the teen market is notoriously fickle. Fashion trends in that demographic come and go too fast for my liking. Express looks to be the better buy.
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