Express Should Accept a Buyout and Go Home

Shares of Express (EXPR) rose nearly 21% and closed at $16.45 per share on Friday, June 13, 2014 after news broke that private equity firm Sycamore Partners had sent a letter to the retailer which stated its interest in acquiring the company. The retailer, which sells apparel and accessories for men and women in their 20's and 30's, reacted strongly to the news by implementing a "poison-pill" defense strategy to defend itself against the potential acquirer. However, at first glance this doesn't appear to make sense. Since it went public, Express's net profit has fallen steadily, which begs the question -- should Express sell itself to Sycamore Partners in order to save itself?

Going home
Express has certainly had its share of different owners over its 30+ year history. The first Express store opened in 1980 under the ownership of fashion retailer Limited Brands, which today operates under the name L Brands (BBWI 0.30%) and owns popular brands like Victoria's Secret and Bath & Body Works among others. Retailers such as Dick's Sporting Goods, Abercrombie & Fitch, and The Limited were also once owned by Limited Brands (i.e. L Brands) before they went public themselves.

In May 2007, Limited Brands sold 75% of its ownership in Express to private-equity firm Golden Gate Capital Partners. Three years later in May 2010, Express went public, selling 16 million shares and raising around $272 million. What some may not know is that Stefan Kaluzny, now a member of the Sycamore Partners team, worked for Golden Gate at the time of its acquisition of Express from L Brands. If Kaluzny makes an offer to buy Express and is successful, Express will be coming home in a sense, and that very well may be its best fit for long-term sustainability in the fashion retail industry.

Performance since the IPO
Despite its revenue gains since it first went public, Express has not experienced much in the way of profitability. In fact, the company's net profit has actually fallen by 17.2% over the last three fiscal years. While the company has made strides in expanding its store count throughout North America, it seems that increased competition from teen apparel and accessories retailer The Gap (GPS -1.28%) and women's fashion retailer Ann Inc. (NYSE: ANN) have prevented Express from growing its net profit over the last three years, and thus put Express in a very difficult situation.

Furthermore, according to one Bloomberg article, the company announced in May that it plans to close 50 of its under-performing retail stores in the next three years as part of its turnaround strategy. In addition, the company lowered its annual guidance by nearly 37%, stating that it expects to earn $0.90 per share instead of $1.23 per share. The company's past performance, however, paints the real picture.

The figures in the above charts show that Express's profitability is continuing to slide due in part to The Gap and Ann stealing sales from Express, which would have much higher revenue if not for these and other companies standing in its way. Let's face it -- consumers have many options when it comes to their wardrobes. Unfortunately for Express, it appears that consumers prefer merchandise from The Gap and Ann over the styles offered at Express.

Since going public in 2010, Express has been under increasing pressure from all sides as the world of fashion retail is quite tricky. Just ask New York fashion designer Coach, which has found itself losing revenue to Michael Kors, which is increasingly seen as much more "fashionable" than Coach. It's entirely possible that Express, which needs to consistently put attractive items on its shelves every season to satisfy consumers' changing styles, would be better off as a private company without the constant pressure of meeting Wall Street earnings estimates.

Foolish takeaway
Based on Express's performance since it became a private company in 2010, it's clear that it isn't benefiting from operating as a public company. It's unfortunate that the company has adopted a defense against Sycamore Partners as its shareholders have already benefited from the offer and stand to benefit even more from agreement on a higher offer for Express. Time will only tell what Express's fate will be, but one thing is clear: it should think carefully about its company's long-term sustainability before rejecting Sycamore entirely. Being owned by the private-equity firm might just be what the company needs to get back on its feet and ultimately to increase its profitability going forward.