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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.

Express, Inc. (NYSE:EXPR)

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.

Guess?, at $31.80 per share, is worth around $2.7 billion on the market. The market placed a bit higher EV multiple at 6.8 on the company. In the first quarter 2013, Guess? experienced the decline in both its revenue and net income. The revenue decreased from $579.3 million last year to $548.9 million this year while the net income dropped from $26.6 million to only $9.9 million. Going forward, the company expected to generate around $2.57 to $2.61 billion in revenue and around $1.70 to $1.90 EPS. CEO Paul Marciano has shown his concern about soft short-term consumer spending and the sluggish Southern European region. Indeed, Europe is the largest loss generator, with more than $5.2 million in operating loss in the recent first quarter.

Urban Outfitters is the most expensively valued. At $42 per share, Urban Outfitters is worth around $6.2 billion on the market. The market values the company at as high as 11.2 times EV/EBITDA. It is the only company among the three that has decent year-over-year growth in net income in the first quarter ended April 2013. While the revenue increased form $569 million in the first quarter last year to $648.2 million this year, its bottom line rose by more than 38% to $47 million. Richard Hayne, the company’s CEO has attributed the recent growth to the company’s focus on direct-to-consumer channel.

What I like about Express, Inc. (NYSE:EXPR) the most is its most profitable operations, with the highest return on invested capital at 24.3%, while the ROIC’s of Guess? and Urban Outfitters are much lower at only 15.55% and 19.61%, respectively.

My Foolish take

With the highest profitability level, a reasonable valuation and the lowest valuation, Express, Inc. (NYSE:EXPR) seems to be a decent retail stock for investors at its current trading price. I personally think that Express could be worth at around 9 times its EV/EBITDA, with a target price of more than $30 per share.

Anh HOANG has no position in any stocks mentioned. The Motley Fool recommends Guess?. The Motley Fool owns shares of Guess?

The article This Apparel Retailer Could Have a 50% Upside Potential originally appeared on Fool.com.

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