The singular cause of the downfall in Express’ share price was solely its profit warning.
25 Aug 2016 – Seeking Alpha
In general, I like these big moves as the market just wiped out a quarter of the market value of the company. Following such a move, it is clear that the news is not encouraging, yet I do believe that the market might be overreacting a bit.
Shares of Express and many of its apparel competitors can react in a very volatile way to quarterly earnings reports. While trends often can look very good or bad, they are prone to change rather abruptly as well. While the business faces secular headwinds, the move seems an overreaction following a compelling earnings yield (even after profits have fallen already), while management still has a solid track record and some initiatives in place.
Express reported a 6% fall in second quarter sales, coming in at $504.8 million. Worse, comparable sales fell by 8%, although they were up by 7% in the same period a year before. The minus 8% result was a little worse than the company´s own guidance which called for a decline in the mid-single digits.
What is disappointing is that e-commerce sales were down by 7%, as the overall comparable sales trends definitely worsened from the minus 3% growth rate reported in the first quarter.
Negative sales leveraging and the practice of discounting did have a huge impact on margins. Operating profits fell by 320 basis points and were thereby cut nearly in half to 3.5%. Earnings just topped the $10 million mark, equivalent to $0.13 per share, being cut in half as well compared to last year.
These are pretty awful results but they alone cannot explain the huge drop in the share price. One comforting observation is the management of inventory levels, being down by 9% on a comparable basis.