Express Inc. Down to Strong Sell - Analyst Blog

Zacks Investment Research downgraded Express Inc. EXPR to a Zacks Rank #5 (Strong Sell) on Mar 13, a day after the company reported weaker-than-expected fourth quarter and fiscal 2013 results on Mar 12.

Express Inc. had slashed its earnings guidance for the fourth quarter and full year 2013 in Jan 2014 in view of the poor performance during the holiday season, including muted Thanksgiving sales. However, the actual result could not even meet the lowered expectations.

Why the Downgrade?

Fourth quarter earnings of this specialty apparel and accessories retailer declined 19.7% to 57 cents per share from the prior-year earnings of 71 cents (excluding extra week in 2012) and fell 3.4% short of the Zacks Consensus Estimate of 59 cents. However, earnings came in line with the lower end of the company's guidance range of 57-61 cents.

Soft comps, higher-than-expected promotional activity during the holiday period and in January impacted both the top line and margins, which in turn led to soft earnings. Stiff competition from retailers like Abercrombie & Fitch Co ANF and Ann Inc. ANN during the holiday season also led to the lower-than-expected sales.

Sales of $715.9 million increased 1.6% from the prior year quarter (adjusted for the extra week), but lagged the Zacks Consensus Estimate of $729 million by 1.8%. Sales were impacted by the highly volatile environment, harsh weather and lower consumer spending. Sales in the Thanksgiving week also did not meet the company's internal expectations, which led to a weak top-line in the fourth quarter.

Gross margin declined 300 basis points from last year to 32.0%, due to a decline in merchandise margin, owing to increased promotional activity. Buying and occupancy cost ratio also increased by 80 basis points in the quarter, aggravating the gross margin decline.

For full year 2013, Express Inc.'s earnings of $1.37 per share lagged the Zacks Consensus Estimate by 2.1%, whereas sales of $2.219 million lagged the consensus mark by 0.4%.

Retailers like Express remained extremely focused this holiday season in order to make the most of small opportunities. Be it the early-hour store openings, promotional events, free shipping on online purchases or heavy discounts, retailers tried all tricks to boost sales. The company also spent heavily on promotions and offered deeper discounts to entice cautious and budget-constrained consumers. However, the weak response from the consumers led to lower-than-expected sales during the entire holiday season including Thanksgiving.

For the first quarter of fiscal 2014, the company projects a year-over-year decline in comp sales and earnings due to the continued decline in traffic, poor weather conditions and the negative impact of higher-than-expected promotional spending in the fourth quarter. The company expects its comparable store sales to grow in negative low double-digit to negative high single-digit, lower than the flat comp sales growth in the prior-year quarter. The company expects its earnings to be in the range of 12 cents to 18 cents per share, much lower than 38 cents per share reported in the last year quarter.

Based on the first quarter guidance, the company expects 2014 comparable store sales to be in negative low single-digit to flat compared with 3% growth in fiscal 2013. The company expects its earnings to be in the range of $1.03 - $1.23 per share, much lower than $1.37 per share reported in 2013.

Another Stock to Consider

Not all stocks are performing as poorly as Express Inc. Finish Line Inc. FINL is a better-ranked retailer with a Zacks Rank #1 (Strong Buy).