On Jun 3, we downgraded
) to a Zacks Rank #5 (Strong Sell). Estimates of the specialty
apparel retailer declined sharply in response to disappointing
first-quarter 2014 results and meaningful guidance cut for the full
year on May 29.
Express missed the Zacks Consensus Estimate for both earnings
and revenues for the second quarter in a row.
Factors Hurting Results
First-quarter earnings declined 84.2% to 6 cents per share from
the prior-year earnings of 38 cents and fell 57% short of the Zacks
Consensus Estimate of 14 cents. Moreover, earnings missed the
company's guidance range of 12-18 cents.
Despite anticipating a challenging first quarter, the actual
results were even worse than feared. Sluggish comps, SG&A
de-leverage, weak margins and a higher tax rate pulled down
Sales of $460.7 million declined 10% from the prior-year quarter
and also lagged the Zacks Consensus Estimate of $481 million by
4.2% due to a decline in traffic. Comps went down 11% in the
quarter, at the higher end of management's guidance range of low
double-digit to high single-digit decline. Comps were significantly
weaker than flat comps in the prior-year quarter. While comps
trends improved in April, it was not enough to offset the
External factors, like a difficult consumer spending environment
and competitive challenges, led to poor traffic and sales trends at
Express stores. However, poor execution by management and inventory
imbalance, especially in the key women's apparel category, also
hurt sales and comps.
Gross margin declined 370 basis points (bps) from last year to
29.8% due to a decline in merchandise margin, owing to increased
promotional activity and higher discounts. Buying and occupancy
cost ratio also increased 340 bps in the quarter, thereby
aggravating the decline.
SG&A ratio rose 460 bps to 26.7% due to increased marketing
expenses and poor operating leverage due to lower sales. Operating
margin declined a massive 820 bps to 3.3% due to weak gross margins
and higher SG&A ratio.
Headwinds will Continue
The first-quarter headwinds are expected to continue in the
second quarter as well. For the second quarter, the company
projects comps and earnings to decline year over year. Merchandise
margins are expected to decline in the second quarter again as the
company clears through excess inventory. Additionally, SG&A and
buying/occupancy costs will again de-lever due to lower sales
expectations. Moreover, higher tax rate and interest expense are
expected to hurt earnings.
The company expects comps to decline in the mid-to-high
single-digit range in the second quarter, much weaker than 6%
growth seen in the prior-year quarter. The company expects earnings
in the range of a loss of 3 cents to profit of 3 cents per share,
much lower than earnings of 20 cents reported in the year-ago
The company lowered its comps guidance for the full year. Comps
are now expected to decline in a mid-single digit range against
prior range of low single-digit decline to flat. Earnings
expectations were also significantly lowered from a range of
$1.03-$1.23 per share to 74-90 cents. Both comps and earnings
guidance represent a decline from prior-year figures.
The Zacks Consensus Estimates for earnings per share declined
sharply in response to the first-quarter results. The 2014 estimate
went down 28% to $1.14 per share while that for 2015 declined 16.5%
to $1.11 over the last 7 days.
Other retailers that are performing well at the current levels
and are worth considering include
American Apparel, Inc
Foot Locker, Inc.
). All these stocks sport a Zacks Rank #2 (Buy).
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