Express' First-Quarter Earnings Didn't Put the Company in the Express Lane

Express' first quarter fell short of its high hopes--but does that mean investors should avoid the company?

Jun 6, 2014 at 12:47PM

Specialty fashion retailer Express (NYSE:EXPR) saw its stock plummet as much as 7.5% following its first-quarter earnings release on May 29, 2014. The retailer, which provides apparel and accessories for both men and women, had a rough first quarter while most had expected a solid performance. In addition, Express provided its guidance for the second quarter along with its goals for the fiscal year. So just how tough was the first quarter for Express, and does it expect things to get better or worse going forward?

A tough reality
The first quarter was filled with a whirlwind of disappointments and losses for the specialty retailer, which offers cutting-edge designs that attempt to attract consumers between the ages of 20 and 30 years old who are searching for casual, professional, and night-life looks to compliment their active lifestyles. Net sales actually fell 10% from its first quarter last year to $460.7 million from $509.4 million. This drop in sales stemmed primarily from an 11% decline in comparable sales, including e-commerce sales.

What's most startling and disturbing is the fact that e-commerce sales decreased by 2% in the first quarter, whereas a year ago e-commerce sales increased by 48%. This is quite a significant loss of momentum over the last 12 months. In addition, SG&A expenses increased in the first quarter by 9.1% from $112.6 million in last year's first quarter to $122.9 million one year later. What's even more unfortunate is that profit fell by 84.3% from the first quarter of fiscal 2013 to $5.1 million, or $0.06 per diluted share, from $32.4 million, or $0.38 per diluted share. In the face of these losses, does Express expect things to turn around, stay the same, or decline further?  

Just how tough is it out there?
It appears from other recent earnings releases that Express is not the only retailer that endured a tough start to the new fiscal year. Along with Express, competitor American Eagle Outfitters (NYSE:AEO) also suffered a drop in net sales of 5% from last year's first quarter while The Gap (NYSE:GPS) increased its net sales in the first quarter by only 1%. Judging from the figures below, it appears that all three specialty retailers did worse than the prior year's first quarter in terms of comparable sales.

Q1 Financial Results and Growth

Express

American Eagle Outfitters

The Gap

Q1 Net Sales FY 2013

$509.4 million

$679 million

$3.77 billion

Q1 Net Sales FY 2014

$460.7 million

$646 million

$3.78 billion

Q1 Net Sales Growth

(9.6)%

(5)%

1%

Q1 Comparable Sales FY 2013

0%

(5)%

3%

Q1 Comparable Sales FY 2014

(11)%

(10)%

(5)%

It's evident from these figures that Express's comparable sales declined the most among the three companies with American Eagle Outfitters following close behind. Even The Gap's comparable sales decreased in the first quarter; however, The Gap's online sales increased by 13% whereas Express's e-commerce sales decreased by 2%. Despite these losses, all three retailers are managing different issues within their companies such as long-term debt, store closures, store openings, and share repurchases. Which companies will survive the retail heat? Stay tuned for second-quarter results to find out.

Guidance going forward
Along with its guidance for the second quarter and full year, Express announced a strategic plan to refinance $200 million ($199.3 million) of its long-term debt in the second quarter by signing up for a term loan for $300 million. The company has also decided to close 50 of its stores to improve profits by $5 to $8 million. These closures will take place at the end of fiscal 2014, or at the beginning of fiscal 2015. All 50 stores in question will close within a 36-month period.

In addition, Express plans to repurchase $100 million of its common stock through use of available cash on hand. This proposed plan will take place over the course of the next 18 months. Furthermore, the company guided for second-quarter EPS in the range of ($0.03)-$0.03 with comparable sales in the negative mid-to-high single digits with full-year guidance in the range of $0.74-$0.90 with comparable sales in the negative mid-single digits. For investors' sake, let's hope Express beats these estimates. Source:

Foolish takeaway
Foolish investors would be wise to stay away from Express for the time being while it works through its current game plan. If Express can regain control of its store sales and e-commerce sales, it will then be worthy of consideration by Foolish investors. The world of retailing, let alone fashion retailing, is extremely tough to predict and no one knows which way the winds will turn. For this reason in particular Foolish investors would be best served by looking elsewhere. 

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Natalie O'Reilly has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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