Specialty retailer Express (NYSE:EXPR) announced first quarter earnings May 30 that beat the consensus estimate. Not only that but it upped its guidance for the remainder of 2013. Especially strong was its e-commerce revenue which saw a big lift from NBC's "Fashion Star" reality show. Express appears to be slowly pulling itself out of its funk. I'll look at whether there's enough progress to warrant owning its stock.
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Four Times The Volume
Shares were changing hands at four times their normal volume May 30 as investors viewed Express' 23% slide in profits as no big deal. They were more interested in the future. The one-time subsidiary of L Brands (NYSE:LTD) went public three years ago at $17 a share and only now is it starting to exhibit life up 40% year-to-date. Trading below its IPO price as recently as April 22, the improved guidance was much needed relief for the embattled stock.
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Its first quarter profit declined thanks in large part to a highly promotional retail environment. CEO Michael Weiss had this to say in its Q1 press release: "…While we promoted more heavily in the face of a highly promotional environment, we managed our expenses tightly and ended the quarter well-positioned to achieve our annual goals." Of all the news out of Columbus, the following four items stand out as the keys points to its future:
- E-commerce revenue increased 48% in Q1 to $70.7 million or 14% of its overall sales. I've always believed that successful brick-and-mortar retailers also have thriving e-commerce operations. The big uptick in online sales will definitely help strengthen its profitability. Management's smartest move was joining the second season of NBC's "Fashion Star" reality show replacing Hennes & Mauritz (OTC:HNNMY) as the third retailer participating in addition to first season holdovers Saks (NYSE:SKS) and Macy's (NYSE:M). Viewers of the show were encouraged to go online after each show (March 8 through season finale May 10) and purchase the clothes bought by the buyers from all three companies. It's no coincidence then that its first quarter ended six days before the end of Fashion Star's second season. I'm not sure why H&M left the show but Express should be eternally grateful they did.
- Express' second pillar of growth is focussing on its existing stores and trying to make them more productive and profitable. While it now expects comps for all of 2013 to be low to mid single digits compared to flat in 2012. Starting early in the first quarter, it noticed that its conversion rate was going up. Conversion, for those unaware, is the percentage of people who visit a store and actually buy something. You can have lousy traffic and great conversion and still be doing well in retail. However, the other way around and you'll soon be closing the doors. A winning formula gets more people in the door, converts more of those lookers into buyers and finally sells them more items per transaction. CEO Michael Weiss is confident on this front that it is moving in the right direction.
- Its North American store growth is its third pillar and on this front it's taking a very conservative approach with 16 stores opening in 2013, 12 in the U.S. and 4 in Canada. By the end of 2014 there will be 15 stores open in Canada, a population of 35 million. In comparison California has 76 stores and a population of 38 million. I never understand American retailers doing business in Canada. Instead of putting 10 stores in one major city like Toronto; they put five in Toronto, two in British Columbia and four in Alberta spreading their resources way too thin. On a positive note, it's moving to build an outlet division to wrestle some business from peers like Buckle (NYSE:BKE) and Genesco (NYSE:GCO). Perhaps Express can take a page out of Genesco's book when it comes to Canada. They've done a great job focussing on Southern Ontario rather than reaching into every Canadian nook and cranny.
- Its final pillar of growth is international expansion. It ended 2012 with 11 franchise-operated stores in the Middle East and 4 franchisee-operated stores in Latin America. Partnering with local operators with years of industry experience, it plans to open 30 stores in Latin America and many more elsewhere. In the Middle East it's partnered with Alshaya Group, the same people who run the Starbucks (Nasdaq:SBUX) franchises in the Middle East. By partnering it reduces its investment risk while gaining valuable on-the-ground insight. Given its pace in Canada, this will be a far more important piece of its business.
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This past year was a major stumble in its three-year run as a public company. In addition, the first quarter was a real step back in terms of profitability. However, the work it's doing in e-commerce as well as internationally leads me to believe it is indeed headed in the right direction. Now if it could only do a better job in Canada and I'd be truly convinced. If you've got 2-3 years now is a perfect time to invest in its stock.
At the time of writing, Will Ashworth did not own shares in any of the companies mentioned in this article.