Stifel Expects Upside to Express' (EXPR) Cautious Outlook; Reiterates 'Buy' Rating
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Stifel affirms Express (NYSE: EXPR) at Buy with a price target of $15 following meetings with David Kornberg, President & CEO, and Perry Pericleous, SVP, CFO & Treasurer.
Analyst Richard Jaffe noted the following key takeaways from the meetings:
- What Drove 2Q’s Weakness? In addition to continued weak traffic, a challenging 2Q was driven by 1) too many style choices that resulted in a lack of clarity for the customer, 2) Express’ merchandise and marketing skewed too young, alienating EXPR’s older customer and 3) the company pulled back too much on its direct mail promotions. In combination, these actions resulted in weaker than planned sales, which drove increased clearance activity and expense deleverage.
- Challenging 3Q Likely, But Upside to Management’s Extremely Cautious Guidance – Since the company’s 2Q earnings call on 8/24/16, EXPR has traded off 27%, a greater decline than the average of our coverage, (4)%, and the S&P 500, which is flat. However, we believe the current share price provides an attractive entry point. Management’s guidance assumes 2Q’s weak trends will continue through the 2H, despite significant changes put in place by management including: an improved merchandise assortment featuring rationalized choice counts that clearly identify, curate and communicate important trends for the brand’s target consumer and improved marketing initiatives that we believe should drive traffic through customer acquisition and retention. The merchandise mix is expected to show some improvement in 3Q, more in 4Q and should be 100% right (sharply focused and trend right) by 1Q17. These initiatives combined with prudent expense management ($9 million of expense savings in the 2H) and strict inventory control (with shorter lead times and significant open to buy) should provide upside to management’s cautious 2H guidance.
- Reiterate Buy - Longer term we expect sales growth and operating margin expansion driven by: an improved merchandise assortment fueled by chasing into strong selling merchandise, better systems, real estate rationalization, outlet and e-commerce growth and more compelling marketing. As visibility for a return to low double-digit operating margins become more evident, we believe the stock will trade up to our $15 target price (approximately 11.5x our 2017 EPS of $1.30). An 11.5x multiple represents a discount to the two year average of the consensus out year multiple (12.4x), which we view as appropriate given current business trends.
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