Express, Inc. (EXPR): This Apparel Retailer Could Have a 50% Upside Potential

Express, Inc. (NYSE:EXPR) has popped significantly at the end of May, from $18.80 per share to nearly $22 per share. Since the beginning of the year, it has delivered a sweet gain of nearly 44.5% for its shareholders. The positive momentum for Express on the market was due to the fact that the retailer had recently raised its full year 2013 guidance. Should investors invest in Express after an increase in its full year guidance? Let’s take a closer look and find out.

Increasing revenue but declining net income

Express is a specialty retailer of apparel and accessories, operating around 620 retail stores in the U.S., Canada and Puerto Rico. In the first quarter of 2013, Express, Inc. (NYSE:EXPR) experienced a nice year-over-year growth in its top line, from $496 million in the first quarter 2012 to more than $508.5 million this year. However, the net income came in at only $32.44 million, 22.8% lower than the net income of $42 million in the first quarter last year. The lower net income was mainly due to the significant increase in the cost of goods sold, buying and occupancy costs. The reported operating cash flow was only $5.4 million, much lower than its operating cash flow of $45.6 million last year. The lower operating cash flow was attributable to the significant rise in its inventories and decrease in accounts payable, deferred revenue and accrued expenses.

Raising earnings guidance

For the full year, Express, Inc. (NYSE:EXPR) has raised its EPS guidance from the range of $1.40-$1.54 to $1.48 to $1.58. The company expected to generate around $127 – $135 million in net income, and the comparable sales were estimated to grow at a low or mid single digit number. What I like about Express is its conservative balance sheet with a reasonable leverage level. In May it had $407.6 million in equity, $244.2 million in cash and around $199 million in long-term debt. However, it recorded as much as $197.7 million in trade name/domain name, which was classified as intangible assets. Thus, its tangible book value stayed at only $210 million.

The most profitable retailer with the lowest valuation

Express is trading at around $21.80 per share, with the total market cap of $1.86 billion. The market seems to value Express, Inc. (NYSE:EXPR) cheaply, at only 6 times EV/EBITDA. Compared to its peers Guess?, Inc. (NYSE:GES) and Urban Outfitters, Inc. (NASDAQ:URBN), it has the lowest EV multiple among the three.