In the last week of January, retail investors sent Express (NYSE:EXPR) stock from under a dollar to almost $14 on an intra-day basis. Lucky investors could have walked away as millionaires, particularly those playing in the options ring.
Since then, EXPR stock has fallen back under $3.50, then rebounded to cross $4. As Reddit begins its next round of corporate monetary stimulus, what’s next for the clothing retailer?
That depends on if you’re willing to play the deep value lottery with me. Apparel retailer is typically a cut-throat business, with fashion-oriented companies like Express coming and going every fibe to eight years. But at $3.50, Express is already priced to fail; the value of its cash and inventory on hand is worth twice its entire market capitalization. With coronavirus vaccines rolling out faster than expected, that’s what makes this deep value play so interesting. Redditors might have a point: Express could ride the reopening wave to $14 or more again this year.
EXPR Stock: Cheap Company, Cheaper Stock
Today, Express is a shadow of its early 2010s golden years. Back then, modern muted-color office-wear was all the rage, sending revenues of Express up double-digits annually. Return on invested capital, a measure of profitability, peaked at almost 40% in 2012.
But like most mid-tier fashion companies, Express eventually hit a slump. By 2017, sales started to slow as people moved toward faster-fashion labels with a brighter color palette. The same year, Express retreated from the Canadian market to stem losses.
And when the novel coronavirus pandemic hit, things got even worse. Express’s workplace-focused clothing had no market in a work-from-home environment. And its lack of e-commerce strategy or fashion diversification showed up instantly on its balance sheet. Its cash pile of $207 million shriveled to just $107 million by October 2020. Meanwhile, inventories soared to $305 million as unsold goods piled on store shelves.
How Cheap Is Too Cheap?
By November 2020, Express one of the cheapest companies in the world on a price-to-sales ratio – a stunningly low 0.03x multiple. Investors could have bought in at $0.57, a $40 million market cap.
Those that did would have bought a virtual lottery ticket. Express had generated $2.2 billion of sales and $58 million of profits as late as 2017. Even a return to mediocrity could have priced the firm at $5 to $6. Instead, believers received something even better – a crowd of Reddit investors looking for the next GameStop (NYSE:GME) sent shares even higher.
But now that the stock is around $4, is it a good buy?
EXPR Stock: A Debt Problem
Core to Express’s problem is the issue of debt – all $1.2 billion of it. Because no matter how much your company is worth, the equity value is still zero if the debts will wipe out shareholders. And the longer that work-from-home stays around, the larger Express’ debts will snowball.
Today, deep value investors might peg Express’s enterprise value – the total worth of a given company – between $960 million to $2 billion. (That represents a range of 0.5-1.0x EV/sales ratios). It’s a somewhat large spread but not unusual for companies with high operating leverage; the average mid-range fashion company trades anywhere between 1.7x – 5.8x EV/EBITDA.
But then debt adds an even larger spread. At the high-end, a $2 billion enterprise value suggests a $15/share price – a stunning 320% upside. That value should make any deep-value investor jump for their pocketbooks.
On the other hand, the low-end $960 million EV would make Express look like an underwater mortgage, where debts exceed asset values. The firm will eventually pay down its debt if the business recovers, but the process would take years.
In truth, the value of EXPR is probably somewhere in between – that $5 to $6 range still holds today.
What to Do with EXPR Stock?
Express, however, has a hidden catalyst: the faster-than-expected rollout of Covid-19 vaccines in the U.S. The company’s strength lies in modern-styled office-wear, and the vaccine rollout could have people back in the office as early as this summer. A push to better e-commerce by management, if successful, could boost sales as well.
But style is a fickle thing. Express succeeded in the early 2010s by nudging out stagnant players Ann Taylor and Banana Republic. But as fast-fashion companies like Zara and H&M (OTCMKTS:HNNMY) brought even cheaper alternatives to market, Express found itself turn from hunter to hunted.
As Express stares down the barrel of 2021, its management will have to work quickly to revamp its style lineup. A shift toward home-casual is likely here to stay – making at least a portion of Express’ $350 million inventory instantly obsolete. But Express has navigated these changes before. The company, founded initially as a part of L Brands (NYSE:LB), has been around since the 1980s. And with some luck, the firm might yet figure out the 2020s office style guide before debt sinks its ship. Achieve that, and a $14 share price is just the start.
On the date of publication, Tom Yeung did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tom Yeung, CFA, is a registered investment advisor on a mission to bring simplicity to the world of investing.