Express (NYSE:EXPR) released its fourth-quarter ending Jan. 30 and full-year 2021 earnings on March 21 and provided a very cheery end-of-the-year outlook. Management said that its stores would provide “positive operating cash flow for the year” and “positive EBITDA for the second half of the year.” I will show you in this article that does not mean positive free cash flow. The company will continue to burn up cash, take on debt, or have to sell assets. The problem is EXPR stock will have to survive all the expected losses until then if the recovery even happens.
EXPR stock has been on a roller coaster lately. After shooting up in mid-January from $1.55 to over $9, the stock has dropped like a rock.
There was no takeover, no acquisition, no major news that drove that spike, other than the GameStop (NYSE:GME) effect. It was a classic short squeeze. Now investors have to wake up to the fact that this is a very weak company.
Debt and Negative Free Cash Flow
The company is overwhelmed with debt and negative cash flow. It has $192 million in outright asset-backed loan (ABL) debt. At the end of the year, its current ratio was less than 1. It has leases that are on the liability side of its balance sheet that is as high as $203 million on a short-term basis, despite efforts to gain abatements. These have to be paid off within one year. Long-term leases are $723 million. But to cover all this the company has just $55.9 million in cash.
Moreover, last year, operating cash flow was negative $323.6 million before $16.85 million in capex, for free cash flow (FCF) of negative $340.5 million. Even if we deduct $108 million of that from a negative tax receivable as a one-off, the underlying FCF was still negative $232.1 million. That implies that each of its 570 stores had an average FCF loss of $407,000 last year. This is dreadful and can’t continue if the company wants to avoid going out of business or being drastically restructured.
The problem with management’s statements about expecting positive operating cash flow on the year is twofold. First, all of this is based on having an excellent Christmas season, which is completely unknowable and can’t really be forecast. If the U.S. is in a recession by then from higher interest rates, for example, this is not going to be possible.
For example, consider this. Seeking Alpha shows that for the quarter ending Jan. 31, Express lost $81.2 million in operating cash flow. And then there’s capex spending of $3.4 million. Somehow the company expects us to believe that next year this will turn around.
Secondly, the most important problem with management’s statements is that they expect to see losses all through the first and second, and third quarters, on an operating cash flow basis. That implies huge increases in debt from its present negative net-cash position.
In other words, the company is essentially projecting losses until a miraculous turnaround in Christmas. This was despite the fact that it did not happen this past Christmas.
In this regard, it is interesting to look at statements management made this past year. For example, on July 10, the company provided a cheery-sounding outlook. The two headlines were that 95% of the company’s stores were open and “E-commerce demand was positive in the month of June.”
By Aug. 26, when the company reported second-quarter ending July 31 results, it had no outlook for the year. But then long-term debt was only $165 million and has now risen to $192 million. So I would expect to see long-term debt continue to rise.
If the company does achieve positive operating cash flow for the year, this will help the company but might not prevent it from achieving positive FCF. This is due to capex it must make for its stores during the year. In addition, it might not prevent the company from having to borrow more money.
What To Do With EXPR Stock
If you are going to invest in EXPR stock, you have to realize that everything depends on their Christmas season. If the company is actually going to turn around and recover, Q4 operating and free cash flow has to be positive, as opposed to negative like last year.
Therefore, this stock is a gamble. I don’t see any margin of safety or even a bargain element yet. Best to stay away for now.
On the date of publication, Mark R. Hake did not hold a long or short position in any of the securities in this article.