They say timing is everything. Specialty retailer Express, Inc. (NYSE:EXPR) upped its fourth-quarter and year-end guidance on Jan. 14, three days before its presentation at the 15th Annual ICR XChange Conference in Miami. Owing to better-than-expected holiday sales, its 2012 financial performance won't be so bad after all. Investors jumped all over the news, sending its stock up 24% on the day on seven times the normal trading. Any time a stock jumps 24% in a day, it's always a good idea to let cooler heads prevail. Was it an overreaction to the upside? I'll have a look.
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Express updated its third-quarter outlook on Oct. 2, exactly 25 days before the end of the quarter. At that point it expected a decline in same-store sales of mid single-digits, which is exactly where it came in, down 5% year-over-year. In terms of earnings, it projected somewhere between 16 cents and 20 cents per share. The real number hit exactly at the top end of the range, up 20 cents compared to 37 cents in third-quarter of 2011. So, really, not much changed between the beginning and the end of October.
As part of its third-quarter press release on Nov. 28, Express let investors know that same-store sales in the fourth quarter would drop low single digits compared to a 5% increase in the fourth quarter of 2011. In addition, earnings per share would be between 62 cents and 68 cents, a decline of as much as 11% compared to a year earlier. On a full-year basis, it projected a low single-digit decline compared to a 6% gain in 2011. On the earnings front, it projected as much as $1.53 per diluted share compared to adjusted earnings per share of $1.66 in 2011. That $1.53 projection included as many as four cents due to a 53-week year in 2012.
Forty-seven days later, Express management revised expectations for the fourth quarter and year-end thanks to better-than-expected holiday sales. How much better will they be? Well, if you're like me, a low single-digit decline means a drop year-over-year of no more than one or two percentage points. Now it's calling for flat comps or possibly a 1% increase, which is at most a 3% positive reversal in direction, a good result for sure, but hardly worth a 24% gain. Earnings, on the other hand, seem substantially more encouraging. At the end of November, Express expected no better than 68 cents per share; it now see 72 cents per share or slightly higher. That's about a 6% change to the upside in less than seven weeks. On a full-year basis, it went from a drop of 13 cents or 7.8% in 2012 to a seven-cent decline or 4.2%. While a 360 basis point change is significant, I'm still not sold that it warrants a 24% jump in price.
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Express' stock closed trading Nov. 28 at $14.15. That's a price-to-earnings ratio of 9.5 times 2012 earnings of $1.49, which excludes the extra four cents from this past year's extra week of shopping. That's a considerably lower multiple than some similarly sized apparel stores such as Genesco (NYSE:GCO) and Jos. A. Bank Clothiers (Nasdaq:JOSB). There's only one problem: that's before the 24% bounce. Using the new year-end projections from its Jan. 15 guidance update, the multiple increases to 10.9 times earnings based on $1.59 per share. Therefore, at the end of the day, a 10 cent increase (6.7%) in its projected 2012 earnings per share from $1.49 to $1.59 resulted in a one-day, 24% increase in its stock price. It was quite a day for those holding prior to its announcement.
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The Bottom Line
While I'm still not convinced that Express has a total handle on its business, from a valuation standpoint I have to admit that the 24% increase doesn't seem terribly out of line based on its latest projections and given where it started from. Retail sales were so mediocre this Christmas that any kind of victory, no matter how small, was cause for celebration. Investors feasted on the news - deservedly so.
At the time of writing, Will Ashworth did not own any shares in any company mentioned in this article.