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Can a $400 Million Licensing Deal Lift Express?

Express stock soared as much as 57 percent in Thursday morning trading despite the retailer lowering its full-year outlook after it announced a joint venture with brand management firm WHP Global.

Net sales at the apparel retailer dipped 8 percent to $434.1 million in the company’s third quarter, with the company incurring net losses of $34.4 million, on a loss of 50 cents per diluted share.

In a Nutshell: Express and WHP Global are teaming up to build out an intellectual property (IP) joint venture that will acquire, operate and grow a portfolio of brands. Under the agreement, WHP will acquire certain IP assets from Express.

The move is engineered to help pull Express out of its role as a pure mall-based specialty retailer, where it has struggled to gain ground in recent years despite attempts to retool the company. With WHP in its corner, Express has the resources to expand as a licensing and wholesale platform, break into new potential categories and gain greater access to international markets.

In an earnings call, Express CEO Tim Baxter said the retailer should be able to take advantage of anticipated retail industry consolidation by pursuing brand acquisitions in partnership with WHP.

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WHP Global’s portfolio suggests that the brand manager can aid Express’s ambitions. The company already owns numerous fashion brands including Anne Klein, Joseph Abboud and Isaac Mizrahi, as well as denim brands William Rast and Joe Jeans, all of which the company has acquired since 2019. The brand management firm also owns a majority stake in Toys “R” Us. The company says it generates $4.5 billion in annual retail sales across its portfolio, and has more than 125 licenses worldwide across more than 1,000 partner stores.

The joint venture, valued at $400 million, will be 60 percent owned by WHP and 40 percent owned by Express, with WHP investing $235 million for its stake in the venture.

Express will enter into an exclusive long-term license agreement with multiple renewal options to use the contributed IP for its existing business, and will pay WHP a royalty fee rate of 3.25 percent for the first five years and 3.5 percent after that. Cash earnings in the joint venture will be distributed quarterly to both parties on a proportional basis.

Under the terms of the deal, WHP also will acquire 5.4 million newly issued shares of Express for $25 million, or $4.60 per share. This gives the firm approximately 7.4 percent ownership of the retailer.

Yehuda Shmidman, CEO and co-founder of WHP, will join the Express board of directors as part of the partnership.

Aside from the WHP partnership, Baxter said the retailer “had some misses” in the women’s business, but posted its sixth-consecutive quarter of positive comps in the men’s business. The company’s UpWest comfortwear brand saw sales increase 40 percent. Express also launched a wholesale partnership with Nordstrom in the quarter, Baxter said.

Inventory was $422.7 million at the end of the third quarter, up 10 percent compared to $383.6 million in the year-ago period.

Third-quarter gross margin was 27.8 percent of net sales, a decrease of approximately 540 basis points (5.4 percentage points) compared to 2021’s 33.2 percent margin rate. Merchandise margin contracted by 360 basis points (3.6 percentage points) primarily driven by the challenging macroeconomic and highly promotional retail environments.

For 2022, Express now expects comparable sales of flat to up 1 percent, down from earlier projections of mid-single digits growth. Gross margin rate is forecast to dip approximately 150 basis points (1.5 percentage points), which would be a larger decline than the previous estimate of 100 basis points (1 percentage point.

The specialty apparel retailer also anticipates deeper losses for the full year, with diluted loss per share forecasts ranging between $1.12 to $1.22, instead of prior loss estimates of 16 cents to 22 cents.

Capital expenditures totaled $24.3 million throughout 2022, while cash and cash equivalents totaled $24.6 million at the end of the third quarter.

Short-term debt was $4.5 million and long-term debt was $230.9 million as of Oct. 29, compared to short-term debt of $10.1 million and long-term debt of $108.4 million at the end of the prior year’s third quarter. Operating cash flow was -$95.9 million through the first 39 weeks of the year.

Express said it has $47 million remaining on its revolving credit facility as of the end of the quarter. The retailer has since refinanced the credit facility, increasing the revolver amount to $290 million from $250 million. The loan is expected to be paid in full by November 2027.

The retailer will use proceeds from the WHP joint venture to repay its other existing loan, a $90 million term loan facility also due by November 2027.

Net Sales: Consolidated net sales at Express decreased 8 percent to $434.1 million from $472 million in the third quarter of 2021, with consolidated comparable sales down 8 percent.

Comparable retail sales, which includes both Express stores and e-commerce, were down 11 percent on a year-over-year basis. Retail stores decreased 6 percent, while e-commerce demand declined 17 percent.

Comparable outlet store sales remained flat versus last year.

Net Earnings: Net loss was $34.4 million, or a 50 cents per diluted share loss, in the 2022 third quarter. This represents a decline from net income of $13.1 million, or 19 cents per diluted share.

EBITDA was negative $14.5 million compared to EBITDA of $31.9 million in the third quarter of 2021

CEO’s Take: Baxter blamed slowing discretionary spend on the slippage in the women’s business, as the company is now seeing average unit retail (AUR) prices up “in the teens” for several quarters in a row.

“We also got a little out of balance. The versatility of our tops assortments and women’s wasn’t where it needed to be. And we are making those corrections and expect to have that business back on track as we move into the first quarter based on the corrections we’ve made,” Baxter said.

The CEO also touched on lackluster sales in denim, which has traditionally been a major category for Express.

“Denim is certainly a category that has slowed, and did slow throughout the third quarter, whereas we were seeing tremendous growth in denim through the second quarter and where we were grabbing market share. I’m fairly confident that when we see all the data—that we still will have taken market share in denim, but it is not a category that’s driving growth right now.”