Express Inc. (EXPR, Financial), the American fashion retailer, released its third quarter numbers on December 4 just a day after specialty retailer Abercrombie & Fitch (ANF, Financial) declared a dismal set of numbers for the third quarter. In fact, the numbers announced by Express Inc. seems to follow the same trend as exhibited by Abercrombie & Fitch and the management is also cautious about the sales trend for the remaining year for both the U.S. specialty retailers. Let’s quickly peek into the numbers released by Express Inc. to further decipher the major highlights of the quarter that were shared by the company’s top brass during the earnings call.
The disappointing revenue and income number mix
Net sales decreased to $497.6 million from $503.8 million reported a year ago, showing a dip of 1%. This fell slightly short of analyst expectations of $500 million as net sales for the quarter. In fact, CEO Michael Weiss, noted that the comparable sales reflected a weakening in the store performance as the quarter progressed that was partially offset by the strength in the e-commerce arena. Comparable sales during the quarter actually fell 5%, compared to the uptrend of 5% noticed a year ago while e-commerce sales rose 11% in the quarter to $79.1 million.
In the nine months that ended on November 1, net sales declined 4% to $1.4 billion from $1.5 billion in the prior year period. Comparable sales have declined 7% in the first nine months of the fiscal year, compared to 3% rise in the prior year period. However, this fall in same-store sales was countered by rise in ecommerce sales in the first nine months by 4% to $209.9 million.
For the latest quarter, the retailer stated that its net income fell to $14.6 million, or $0.17 per share, from $19.3 million, or $0.23 per share during the previous year’s third quarter. Soon after the retailer released the net profit numbers which were down from the year-ago similar period, shares of the company tumbled by 9.59% to $13.10 on heavy volume in mid-morning trading on Thursday. This downtrend in the stock was noted even though the company met the Thomson Reuters’ expectations of earnings at $0.16 per share for the quarter.
Outlook is completely dim
Express now foresees full-year earnings in the range of $0.69-$0.76 per share, compared to its previous outlook of $0.85-$0.95 per share. This falls easily short of analysts’ poll by FactSet predicting earnings for the full year to be about $0.89 per share. Not only has the company reduced its earning guidance for the full year, it has also slashed its fourth quarter earnings guidance. In the fourth quarter of the fiscal year, the company expects earnings per share to be in the range of $0.38-$0.45 per share, which is lower than the Street expectations calling for earnings of $0.60 per share.
Michael Weiss stated on the fourth quarter guidance, “As we began the fourth quarter, ecommerce enjoyed a strong Thanksgiving push through Cyber Monday, and our outlet sales continued to exceed initial expectations. However, we have updated annual guidance to reflect our current retail store trends and expectations that mall traffic will continue to remain challenging throughout the holiday period.”
Gross margins affected, yet cash position remains firm
Gross margins as a percentage of net sales declined 110 basis points compared to the third quarter of last year, representing 31.7% of net sales. Merchandise margins improved by 30 basis points, with the gain being more than offset by buying and occupancy costs which, as a percentage of sales, rose by 140 basis points compared to last year’s third quarter. The buying and occupancy deleverage was primarily related to the combined impact of lower sales and higher rent and depreciation expenses.
The company introduced cost-cutting initiatives and continued discipline for reducing the selling and administrative expenses which declined 10 basis points to 25.4% compared to 25.5% in last year’s third quarter.
Remarkably, the company still maintains solid cash flow and the cash balance at the end of the quarter stood at $217.8 million versus $181.6 million at the end of 2013’s third quarter.
Investors should keep the stock on hold
TheStreet Rating team has rated the stock as a HOLD, stating, “The primary factors that have impacted our rating are mixed, some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its reasonable valuation levels, good cash flow from operations and largely solid financial position with reasonable debt levels by most measures. However, as a counter to these strengths, we also find weaknesses including feeble growth in the company's earnings per share, deteriorating net income and poor profit margins."
Hence, going by this recommendation, investors should remain calm as the temporary headwinds that the retailer faces in this fiscal year might just fade away in the coming years.
Last word
The quarter numbers were pretty tainted and did not show any glamour, but the retailer has taken a cautious stand and is implementing brisk cost-cutting strategies to maintain a solid cash flow in the upcoming quarters. Also, with the holiday season on and with ecommerce activities becoming the chief focus of the company, revenue might see an upswing in the coming days. Express Inc. seems to be thinking on the same lines as its rival company, Abercrombie & Fitch to gain sales momentum in the coming quarters.
