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Saturday, May 8, 2021

New perspective on Meme stocks: Express Inc. (EXPR)

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“I think the big takeaway is that the fundamentals don’t apply to retail traders,”

– Noah Williams, day trader from Atlanta featured in Wall Street Journal’s GameStop Mania reveals Power Shift on Wall Street – and pros are in shock

As more and more investors willingly admit that they are betting on stocks, I feel compelled to offer an easy way to make more informed decisions and hopefully save a lot of money. Over the next few weeks, I’ll be giving investors research that shows when stock valuations even go crazy and they should sell. This week I am focusing on Express
EXPR
and put it in the danger zone. See my previous reports on GameStop
GME
(GME) and AMC Entertainment (AMC).

Why Investors Need Independent Research

Wall Street is not on a mission to warn investors of the dangers of risky stocks because they make too much money from their trading volume and from underwriting debt and selling stocks.

Only independent firms are free to provide conflict-free research and navigate Wall Street conflicts and analyst bias. With new technology cutting through the deluge of data in financial deposits and overcoming Wall Street’s research flaws, self-directed investors are in a better position than ever to make informed decisions.

What’s the matter here?

The meme stockpile frenzy highlights the lack of reliable basic research, which creates a vacuum for misinformation that elevates sources like Reddit or social media to excessive levels of influence. Nothing illustrates the lack of a fundamental perspective on stocks even better than the correlation between stock prices and mentions on Reddit, Twitter, and Facebook. Figure 1 shows how Reddit, Twitter, and Facebook mentions of the poster-child memes stock, GameStop, soared in late January along with the share price. Express saw a similar trend, with daily trade volume averaging 54.6 million per day in January 2021, up from 4.3 million per day in December 2020. Trade volume peaked on January 25, 2021 at ~ 359 millions.

Figure 1: GME transaction volume rises alongside social media mentions

Meme Stock # 3: Express Inc .: Danger Zone at All Costs

The EXPR is not worth owning at any cost, unless there is a radical change in its business model, given the poor fundamentals of the company and the improbability that shareholders will even see 1 $ in economic benefits.

With total debt of $ 1.12 billion, including operating leases of $ 1.1 billion, at nearly 5 times its market cap, Express stock investors are unlikely to claim a penny of profits. Express’s economic book value, or the value of the company to shareholders based on today’s earnings, is – $ 60 / share and has not been positive in any year since The bottom line is that the fundamentals, which are in decline, cannot support a price above $ 1 / share, even with the most optimistic recovery assumptions.

Nonetheless, the stock rose from ~ $ 1 / share to $ 10 / share in a single week of trading before resuming the roller coaster ride to ~ $ 4 / share. See figure 2.

Figure 2: Basic research to know when to sell EXPR

Fundamentals Were Bad Even Before COVID-19

Express earnings have been deteriorating for many years, showing how little the stock’s rise was linked to the company’s fundamentals.

Express’s core earnings fell from $ 140 million in fiscal 2010 to – $ 4 million in fiscal 2019, as shown in Figure 3. Core earnings fell to -337 million of dollars in fiscal year 2020 (not in Figure 3, as they are so low that they mess up the y-axis scale). Express’s return on invested capital (ROIC) fell from 19% to 1% during the same period and to -18% in fiscal 2020.

Given the poor fundamentals, EXPR got an unappealing rating before the meme stock frenzy took off.

Figure 3: Base profits of EXPR for fiscal year 2010-2019

Pre-pandemic headwinds persist – Retail apocalypse victim

The COVID-19 pandemic has exacerbated the current upward trend in e-commerce sales and the decline of brick and mortar, which is expected to persist after the pandemic.

COVID-19 has accelerated the demise of physical retailers like Express while highlighting the strength of omnichannel retailers, like Williams-Sonoma
WSM
and target
TGT
. Figure 4 shows that Express was losing ground and underperforming before COVID-19, and its activity only worsened during COVID.

Figure 4 shows that Express revenue has fallen much faster (37% vs. 7%) than all US clothing and clothing accessories stores (“the industry”) over the past decade. As a result, Express’s market share rose from 0.9% in 2010 to 0.76% in 2019 and 0.61% in 2020.

Figure 4: Difference in sales variation 2010-2020: Express vs clothing and clothing accessories stores

Poor fundamentals and structural headwinds, however, didn’t stop Express’s stock from skyrocketing during the stock meme’s frenzy. To give readers an idea of ​​how insane the stock was overvalued at its peak, I do the math and show how the company should behave to justify $ 10 / share.

$ 10 “Crazy” Explained: Involves More Revenue Than Abercrombie & Fitch
ANF

My Reverse Discounted Cash Flow (DCF) model is a great research tool for analyzing the expectations implied by stock prices. To justify $ 10 / share, this shows that Express must:

  • immediately improve its profit margin to 6% (i.e. Express’s 10-year average before COVID, compared to 1% in fiscal 2019 before the pandemic) and
  • increase revenue by 14% compounded annually through 2030 (which assumes that revenue increases according to consensus estimates in fiscal years 2021 and 2022 and by 11% each year thereafter, which is higher than the estimates of the fiscal year 2022 of 9% revenue growth)

In this scenario[1], Express has revenue of approximately $ 4.4 billion in fiscal year 2030, which is approximately 187% of its record revenue for fiscal 2015 and more than the revenue of Twelve Month Business (TTM) of Abercrombie & Fitch (AEO), Guess Inc.
GHG
and the SAF of Chico
CHS
. See figure 5 for more details. For reference, Express’s revenue fell 1%, compounded annually in the five years leading up to COVID-19.

Figure 5: Historical Express Revenues vs. Implicit DCF Revenues: Scenario 1

Still crazy at ~ $ 3.50 / share

To get a perspective on the current price, I run the same analysis to show what the company needs to do to justify ~ $ 3.50 / share:

  • immediately improve its profit margin to 6% (i.e. Express’s 10-year average before COVID versus 1% in fiscal 2019) and
  • increase revenue by 10%, compounded annually until fiscal year 2030 (which is higher than the consensus estimate for fiscal year 2022 of 9%)

In this scenario, Express generates more than $ 3.1 billion in revenue in fiscal year 2030, 33% more than Express’s record revenue of $ 2.4 billion in the previous year. in fiscal 2015 and above TTM revenue from peers such as Abercrombie & Fitch Guess and Chico’s FAS. See figure 6 for more details.

Figure 6: Historical Express Revenues vs. Implicit DCF Revenues: Scenario 2

Lagging profitability makes valuation even more unlikely

Based on the above scenarios, to simply justify its current share price, Express needs to dramatically improve profitability while growing revenue to levels far above its peers. Such a scenario seems even less likely when one compares Express’s current fundamentals to the peers listed in its proxy circular. According to Figure 7, Express has the lowest NOPAT margin, ROI and ROI of its peers.

Figure 7: Profitability Measures: Express vs Peers: TTM

High short interest was guaranteed

Ahead of the stock rally even in January, ~ 12% of Express’s float was sold short, which seems justified given the poor company fundamentals and structural headwinds the industry is facing. Now, there are currently 5.4 million shares sold short, which equates to ~ 9% of its float sold short. While short-term interest is waning, the roller coaster’s stock price hasn’t scared off many investors who believe Express’s best days are behind.

More reliable basic research on other Meme Stocks

With a better understanding of the fundamentals, investors have a better idea of ​​when to buy and when to sell – and – how much risk they are taking when holding a stock at certain levels.

I have already illustrated the extreme risks investors take in buying GameStop and AMC Entertainment. In the coming weeks, I will continue to perform this same analysis on other stocks of the same: Blackberry (BB), Genius Brands
GNUS
, Koss Corporation (KOSS), Naked Brands Group (NAKD) and Nokia (NOK). Each of these stocks was on Robinhood’s restricted stock list and each saw a significant rise and fall at the end of January.

I’ll also feature other meme stocks that trade at levels that are totally out of touch with fundamental reality, like Netflix.
NFLX
and Tesla
TSLA
.

Figure 8: Meme stocks disconnected from fundamental reality

Disclosure: David Trainer, Kyle Guske II, Alex Sword, and Matt Shuler receive no compensation for writing about a specific stock, style, or theme.

[1] All dates in these reverse DCF scenarios refer to the year in which the business files its 10-K, which may differ from the year Express uses to describe its fiscal year. For example, in my inverted DCF model, EY 10: 2031 would refer to what Express would call fiscal year 2030.

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