Express Inc - Part 1
Another "Value-Trap" Fashion Retailer or a potential multi-bagger?
First and foremost, I have to disclose that I have 0 experience investing in a fashion retailer and therefore, much of the analysis here may not be very insightful. However, I am attempting to look into this space and gain some experience and knowledge looking at this very interesting opportunity that is Express Inc.
What’s the story?
Express Inc isn’t exactly a very small company. Well, on one hand, its market capitalization places it on a micro-cap level, at 60mil USD (200mil EV excluding Operating Lease) at the time of writing. However, looking from an operating statistic point of view, we start to see why Express Inc is disliked by the market.
Comparing some of the major players against Express Inc, we first notice that Express Inc looks to be much bigger than players such as Ralph Lauren, A&F, Zara, and even H&M from the number of stores basis. Yet, its revenue per store is the lowest among this list. This highlights a key weakness of Express Inc - It stores and assets are not productive.
This could be driven by a few reasons but I think there are 2 main key reasons:
1. Its products and inventory are not attractive to consumers,
2. Its has poor store management in terms of location over-concentration, poor geographical locations or unattractive layout/design of stores.
What Caught My Eye?
There is 1 key major initiative that has happened which I think few other turnaround retail cases could argue the same - Express Inc has a joint venture partnership with WHP Global, an international brand management firm that specializes in the acquisition, management, and licensing of consumer brands, according to their website. WHP Global currently owns many major brands, including - Joseph Abboud, Joe’s Jeans, Anne Klein, Bonobos and Toys “R” Us."
On the 25th of January 2023, WHP Global and Express Inc closed its deal and initiated on a strategic partnership. In this partnership, WHP Global will invest $250mil in gross proceeds to be used to 1. Directly pay down high interest term loan, 2. invest in omnichannel platforms and 3. pursue co-acquisitions of other brands together with Express. One of such brands that was co-acquired is the brand Bonobos which was previously own by Walmart.
Now, WHP is acquiring newly issued shares of EXPR at $4.60, for a total investment of $25mil into EXPR, at a ownership level of 7.4%. This investments reflects a 5x price over the current market price of EXPR.
Secondly, EXPR Inc and WHP is establishing a IP joint venture where WHP invests $235mil for 60% ownership of this IP and EXPR contributing certain IP in exchange for 40% of ownership. This joint venture is valued around 400mil.
In total, EXPR will gain around 235mil in capital to pay down its $90mil term loan and fund the minimum royalties of $60mil to the IP JV, of which EXPR owns 40% of. Express will continue to operate the express brand in the US through a 100-year license agreement with the new IP joint venture. The remaining 85mil + cash balance is used to strengthen the balance sheet and acquire other retailers.
In the Q3 2022 earnings call, a question was asked regarding the structure and criteria under the new acquisitions that EXPR and WHP would be pursuing. Tim Baxter, CEO answered that “ The key criteria would be whether if this would be accretive to topline and bottom line? Could it drive growth through such acquisitions?.”
With respect to the structure of acquisitions, “it would be in the same type of IP JV such as the WHP Global and EXPR IP Joint venture. Any brands that would be operating would be operating just like Express under a license agreement with the IP JV”
Now in April 2023, WHP Global and EXPR Announced the Bonobos Acquisition which would give us an inside look of how such future acquisitions would be structured under this new IP JV.
Terms of the Bonobos Acquisition - EXPR and WHP Global to Acquire Bonobos for $75mil
Bonobo’s operating assets and liabilities would be sold to EXPR for $25mil (100% cash)
WHP will acquire the Bonobos Brand for $50mil
IP Licensing Agreement
Terms:
WHP will grant EXPR the right to use the acquired intellectual property for the operation of the Bonobos business in the U.S., pursuant to an exclusive, long-term License Agreement with multiple renewal options
• EXPR will pay WHP a royalty on all retail and wholesale sales of goods branded with a licensed mark, and all sales of any goods through channels (e.g., ecomm sites and brick and mortar stores) branded under a licensed mark
• Royalty rate of 3.25% on Retail sales for years 1 – 5 and 3.5% thereafter
• Royalty rate of 8.0% on Wholesale sales
Bonobos Financials
200mil Sales, with 30% CAGR over past 3 years
35% Gross Margin
60 GuideShops - new experiential retail experience where it typically involves making an appointment to receive high-touch, one-on-one service without the hassle of crowds, imposing walls of merchandise, uncomfortable fitting room sessions and bulky shopping bags. Customer service guides, also called “ninjas,” help shoppers find ideal fit and styles, then place orders on the spot for one- to two-day direct delivery.
Freed to place far less emphasis on inventory, the Bonobos guideshops feature spacious, uncrowded interiors with adventurous designs and comfortable places to sit and relax while “shopping.”
According to the investor presentation, the guideshop model requires lower working capital and rental expense due to lower inventory needs and smaller rent spaces.
Management Expectation of Bonobos on EXPR 2022.
However, note that the gross margin is not factoring in the 3.25% royalty rates. If one would include that, the 35% gross margin rate would fall to about 31%, meaning the increase of gross margin for 2022 would be minimal at best, due to the small sales attribution to Bonobos for EXPR (10% of sales).
So how has Bonobos been doing?
According to EXPR 1Q2023 Earnings Presentation, the net sales from Bonobos for Full Year 2023 is expected to be in the range of 125mil - 150mil, a decline of 25% from FY2022. Furthermore, the gross margin is expected to compress by 8%, with 3% compression due to royalty rate and a 2% uplift from Bonobos (-1% net from Acquisition of Bonobos). This does not look to be a positive factor for EXPR, at least in the near term.
So, let us consolidate and simplify what has changed.
EXPR has reduced near term liquidity and solvency challenges by entering into a joint venture with WHP Global.
WHP Global structures the deal in such a way that it provides a 1 time capital influx into new JVs and in return , it accepts royalty rates of 3.25 - 3.5% of sales. Meanwhile, EXPR handles the operating of newly acquired brands, provides a smaller capital contribution, but handles the future capital expenditures and royalties payments to WHP Global.
From an analysis point of view, what does it mean?
I can potentially argue that EXPR is doing the right move. It is being given a capital light manner to pursue more interesting brands, solving its key challenge 1 of having unproductive assets at bad geographical locations. However, the 3.25% - 3.5% structural royalty rate is concerning, given that even players like Gap Inc have LSD% for net margin. EXPR has historically have a low level of net margin and at a significantly higher level of gross margin as compared to Bonobos, this does not seem to be a meaningful expansion of margins from a business POV.
In Part 2 of EXPR analysis, I will expand more on the financials, outlook and valuation of EXPR.