Express Could Turn Into A Self-Help Story In Second Half Of 2017

Although there is low visibility in the near term, MKM Partners’ Roxanne Meyer believes there could be opportunity for Express, Inc. EXPR to become a “self-help story."

The analyst maintains a Neutral rating on the company, while lowering the price target from $11 to $10.

Disappointing Guidance

While Express’ Q4 results were in line with expectations, drive by a 13 percent decline in comp and a 640 bps decline in operating margins, the Q1 guidance was disappointing, given that the comp and EPS guidance were meaningfully below consensus, “reflecting what could be the company's least profitable 1Q since going public.”

“While we appreciate the environment was exceptionally tough in early February, guidance suggests that 1Q will not be an inflection quarter despite the reduced SKU (stock keeping unit) count and changes to merchandise, making it tough to appreciate the extent of improvement to fashion,” Meyer stated.

This leads to lower visibility into the pace of improvement in Q2 as well, and could prove to be an overhang on the stock in the near term.

Related Links: Uncertainty For Express Investors Remains

Catalysts Expected

However, the analyst expects several catalysts to emerge later in the year, including new systems, the loyalty program relaunch and lower sourcing costs. These, combined with the opportunity to buyback shares as well as materially easier comparisons, could “create an interesting set-up.”

Express’ Q1 guidance implies comp and gross margin deceleration on a two-year basis, with store comps expected to continue in the negative double digit range.

“While we look for gradual improvement to gross margin as we move throughout the year, we now assume gross margin in 2Q will decline by 100 bp, despite easing compares, and assume it improves by 300 bp vs. LY (last year) by 4Q,” Meyer went on to say.