Express Inc. Down to Strong Sell on Poor Q1 - Analyst Blog

On Jun 3, we downgraded Express, Inc. ( EXPR ) 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 earnings.

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 February/March weakness.

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 quarter.

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 . ( APP ), Foot Locker, Inc. ( FL ) and Zumiez, Inc. ( ZUMZ ). All these stocks sport a Zacks Rank #2 (Buy).

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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