Express Slows Down

J.P. Morgan cut estimates on the apparel retailer.

By J.P. Morgan ($12.88, Nov. 26, 2012)
We are adjusting our fourth-quarter estimate as we believe Express likely saw an improving comp trend over the Black Friday weekend driven by deeper promotions.
We believe that this year's 50% off promo likely grabbed customer interest, helping to support comps. However, as compared to last year's offering, we expect this will likely come at the expense of the company's gross margin. At the current valuation (nine times fiscal 2013 earnings-per-share estimate), we believe investors would likely applaud any sign of improving sales, but we remain Neutral at present as we believe it will be essential to monitor the cost of doing business when determining Express' (ticker: EXPR) margin profile going forward. Express is set to report third-quarter EPS on Nov. 28 before the market opens.
The cost of doing business -- the recent share run could see a pause if a sustainable turn has yet to materialize. Based on our channel checks, Express appears to have successfully driven traffic amid, what appears to have been, a generally flat/weaker softline Black Friday showing. We believe the company drove among the strongest absolute traffic and conversion across peers (we do recognize that Express enjoyed "a record Black Friday sales day" last year); however, Express appears to have gone deeper with their promotion (e.g. beginning with a 50% off versus 40% last year) which we believe will likely come at the expense of gross margin; we are projecting an about 280 basis-point decline in the fourth quarter.

Online clearance levels suggest strong sell-through. Based on our analysis, Express has seen its online promotional stock-keeping unit (SKU) count decrease meaningfully sequentially, in what appears to be a successful sellthrough of the marked-down product. By our math, the promotional SKU count is down roughly 65% compared to the beginning of quarter levels, with the vast majority driven over the past holiday weekend.
Since the company's Oct. 2 update, fiscal 2012 EPS consensus has dropped more than 30 cents to about $1.41. However, we are concerned that fiscal 2013 numbers still remain elevated and we expect to see ongoing estimate revisions downward. We are projecting fiscal 2013 EPS of $1.40 versus the Street at $1.57.
We are tweaking our fourth-quarter comp estimate slightly to negative 1.5% from the prior negative 3% and we are lowering our gross-margin estimate as we believe Express may have seen an uptick in top-line trends at the expense of margin. We are lowering our fiscal 2012/2013 estimates to $1.40/$1.40, respectively, from $1.48/$1.46, respectively. We are maintaining our December 2013 price target of $14 based on nine to 10 times our fiscal 2013 EPS estimate. We believe Express will continue to trade at a discount-to-peers in the near term as uncertainty remains and in light of the first quarterly negative store-level comp and earnings before interest and taxes (EBIT) margin contraction keep investors focused on execution risk.
-- Simeon A Siegel
-- Brian J. Tunick
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