Express Is Now Basically A Long-Dated Call Option (NYSE:EXPR)

WHP Global is the real winner of its agreement with Express (New York stock market :EXPR) given its IP JV, even though it overpaid its stake in EXPR. However, the beat fashion retailer could still be worth a speculative bet.

Company Profile

EXPR is a fashion apparel retailer that sells women’s and men’s apparel, accessories and related items. The majority of its items are created by its in-house design team.

More than 90% of its sales are clothing, while less than 10% are accessories. Womenswear accounted for 57% of sales in fiscal 2022, with menswear the remaining 43%.

The company sells its clothing brand online and in its own stores. Its stores are mainly located in shopping malls, lifestyle centers, outlet malls and streets. At the end of October, it had 351 retail stores and 202 factory outlets. Retail stores and e-commerce accounted for 72% of its sales in the first 9 months from FY23.

The company launched the UpWest brand in 2019. UpWest positions itself as a comfort-oriented lifestyle brand, offering casual wear, loungewear and pajamas. The brand has 14 stores and a wholesale agreement with Nordstorm (JWN).

Its articles are generally made in Asia. The company says it uses 70 suppliers utilizing approximately 270 manufacturing facilities in 20 counties.

EXPR also offers a private label credit card through Comenity Bank. The bank owns the credit card accounts and Alliance Data Systems serves the customers.

Opportunities

EXPR’s biggest opportunities focus on acquiring additional brands, licensing and international expansion.

In January, the company entered into a strategic partnership with global brand management firm WHP Global. Together, the companies are expected to pursue acquisitions to expand EXPR’s brand portfolio. The company believes that its omnichannel platform can help reduce costs and increase margins for an acquired company.

As part of the deal, WHP made a $25 million PIPE investment in common stock in EXPR, taking a 7.4% stake. The newly issued EXPR shares were issued at $4.60. EXPR received $260 million in gross proceeds from the sale.

The two companies have also formed an intellectual property company [IP] joint venture intended to “evolve the Express brand through new national category licensing and international expansion opportunities”. WHP will own 60% of the joint venture, with EXPR holding the remaining 40%.

Commenting on the sound agreement Call Q3EXPR CEO Tim Baxter said:

“We have entered into a mutually transformative strategic partnership with WHP Global, a leading brand management company to advance our Express Way Forward strategy, evolve our Express brand and accelerate our business growth through brand acquisitions. With this partnership, we are beginning a bold new chapter, which we believe will drive greater shareholder value. Let me tell you about the key elements of this partnership. First, we will leverage our fully integrated omnichannel platform and operational expertise to acquire, operate and grow multiple fashion brands. Second, we will establish an intellectual property joint venture with WHP to evolve the Express brand through category expansion and global licensing. And third, we will immediately strengthen our balance sheet with gross proceeds of $260 million from WHP’s investment. When combined, we expect these components to lead to accelerated long-term profitable growth and increased shareholder value.

On the acquisition front, the company could buy a smaller brand that doesn’t have a huge online presence, cut the company’s costs, and build an online infrastructure into it. EXPR would also likely have a better scale of supply which could help cost-wise.

On the licensing front, the company plans to pursue licensing opportunities for its brand with international partners and in non-core categories. This is a common strategy among brands that give their name to products such as perfumes, shoes and eyewear. WHP is considered an expert in licensing.

The company could also license its stores to international partners. This is a low-cost way to enter foreign markets and use brand awareness to generate additional revenue through royalties. An international licensee must also have a better understanding of local markets and trends.

However, perhaps the biggest benefit of the deal is that it bolsters EXPR’s fragile balance sheet thanks to the cash injection from WHP. The company had more than $230 million in debt at the end of the third quarter and was burning cash, which is not a good combination for a retailer.

Risks

Despite the agreement with WPH, EXPR still faces many risks. Although the deal gives the company a cash injection, if it is to make an acquisition, it will likely have to be in cash. Or the company could dilute shareholders through a stock offering to pay for it. Given the current stock price and current interest rates, neither is a great option.

EXPR is also looking at poor results in FY22, despite flat comps. The company noted a challenging macro environment and a highly promotional environment with deep discounts when it slightly lowered the midpoint of its full-year guidance in January. It now expects a full-year EPS loss of -$1.18 to -$1.22 from a previous forecast of -$1.12 to -$1.22.

The macroeconomic environment, meanwhile, could continue to deteriorate, as the Fed continues to hike rates and tech companies lay off workers. If the United States goes into a recession, it won’t be good for a company like EXPR.

EXPR also faces a fashion risk, and it has a habit of not always being fashionable. In the third quarter, the company admitted to hiccups in its women’s business that impacted results. The management has already stated that there will always be some hiccups with fashion, but that it is also very successful.

Inventory issues are another risk, and EXPR had nearly $40 million more in inventory at the end of fiscal 2023 than at the same time last year. Of course, high inventories lead to discounted sales and pressure on margins.

It should also be noted that with its new joint venture, the company must pay the joint venture a royalty rate based on its net sales. It will pay a rate of 3.25% for the first five years and 3.5% thereafter. It will pick up the distributions (40%), but WHP seems to have the better end of the deal here.

Conclusion

Although billed as a transformative deal, the WPH deal doesn’t solve all of EXPR’s problems, and possibly none of them. The IP deal heavily favors WHP, which will bring in about 2% (60% from 3.25 to 3.5%) of EXPR’s $2 billion in revenue, or $40 million, each year, even though it does not add a single international partner or other opportunity. The $40 million, meanwhile, wipes out the $30 million in general and administrative costs and $10 million in interest payments that EXPR was looking to save in FY24.

An acquisition, meanwhile, doesn’t seem to make much sense to current shareholders given the cost it would take to complete it – either putting the balance sheet back in trouble or diluting shareholders. And any deal that would be accretive would probably have to be another distressed brand that needed help fixing.

Outside of 2020, EXPR was solidly FCF ahead of 2022. However, it spent $119 million in cash in its first three quarters of FY23. With the cash injection, it will have cash net of just over $50 million and Q4s are generally positive in FCF. As such, the company likely has a few years to right the ship and get back to positive FCF. Lower sales and higher general and administrative expenses were the main drivers of this change. The high-margin royalty payments from his deal with WPH would certainly help boost his FCF profile.

If the company can return to a positive FCF as in the past before the pandemic, then it could increase 5 to 10 times its current price. If it keeps floundering and burning money, it could be $0.

If you are a gambler, the risk-reward ratio is favorable enough to make a small bet on EXPR stock.

Editor’s Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these actions.