The Express Sell-Off Looks Like An Overreaction

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Like quite a few others in the apparel retailer space, Express took a dive last week after releasing unfortunate guidance for the coming quarter. The clothing company actually met analyst demands for the just-ended quarter and saw both the top and bottom lines grow respectably. The market, however, took no comfort in rear-facing numbers and subsequently shed nearly a quarter of the company's market cap. At this level, Express is one of the cheaper picks among apparel stocks. The difficulties facing the company and its industry may remain for the short-term, but does Express' long-term view look rosier with its value-tempting stock price?

Earnings recap
As mentioned, top line sales grew in the company's third quarter—up 7% to $503 million. The number came in as expected due to previously issued guidance. Comparable store sales looked strong at 5% over last year's number, though investors should keep in mind that the comp quarter from 2012 saw a 5% decrease in same-store sales.

Unsurprisingly, e-commerce looks to be the strongest segment in the company's portfolio, growing sales  by 29% in the quarter to $71.2 million. The 630 store-strong business managed to boost margins even though it was a heavily promotional environment, mainly due to better product mix.

On the bottom  end of the income statement, the company improved earnings by $0.03 per share to $0.23 ($19.3 million in net income).

For a difficult quarter on a macroeconomic level, Express deserved some commendation for its success, but that did little to assuage forward-looking investors and analysts. Fourth quarter same-stores sales are projected to rise in the low single digits, with lower net income year-over-year. At the top end, the company is looking for $0.71 per share. Analysts were looking for $0.75.

Selling off more than 20% of the company last week was a bit drastic, though the stock has yet to make any recovery  to speak of. This brings up the subject of valuation.

At under 11 times forward earnings, Express is far cheaper than most other apparel stocks. The admittedly more successful Gap trades at slightly 13.2 times, while fellow straggler Wet Seal (a pure play on the young female demographic) trades at a rich 22 times earnings. On an EV/EBITDA level, though, Express trades roughly in line with Gap. The Gap may be a stronger company operationally (with stellar management), but Express does have a solid looking balance sheet with a cash horde that covers the company's debt load. The company is in a good position to turn around once conditions improve.

As the economy provides better opportunities to the retail industry, Express could conceivably recover in line as its status as a mall staple remains strong thanks to its classic looks and easily identifiable brand presence. While not quite in deep discount territory, Express' sell-off could be an opportunity for the bargain hunting investor.

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