The Meme Stock That Once Was
The Meme Stock That Once Was
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The Meme Stock That Once Was
Back in early 2021 I was knee deep analyzing undervalued retail stocks. The market was incredibly pessimistic. These once profitable retailers were trading like they were about to go bankrupt. Assets and brands worth multi-millions trading for pennies on the dollar.
But who could blame Wall Street for this mispriced event? Retailers have been hated for years from the rise of Amazon. The old adage that retail was dead emerged even stronger during the pandemic. And combine that with the government forcing stores to close down for months on end, it became an absolute bloodbath.
One retailer I was looking at during this time period was Express, Inc. (“EXPR”). The company was trading for about ninety cents. Less than a buck. Market cap was a mere $60 million. $60 million for a company that historically generated $2 billion in sales and $100-200 million in operating income.
It looked cheap AF. The equity was essentially priced like a levered stub. Any positive news and the stock would become a multi-bagger. Re-rate 5-10x higher. Anyone with the balls to buy would kill it.
I was analyzing the entire beaten down retail sector at this point. I remember going out into Manhattan and popping in every clothing store that was still open. Trying to gauge if customers were returning. Or if Wall Street was right and every retailer was a zero. I flew out to Miami and did some channel checks in the south as well. These on the ground due diligence trips lead me to one conclusion: retailers were not dead and people wanted new stuff.
Then I picked up the phone. Set up management calls with every retailer that I could. Talked to American Eagle, Abercrombie, Lululemon and a handful of the smaller guys. I was trying to get a good sense of the industry as a whole post-COVID.
When I called Express, I was surprised someone picked up. I was even more surprised that they were down to talk to me. And I was shocked when it seemed from their vocal cues like they were not planning on going bankrupt.
I was planning on buying hand over fist. Then a tweet went out before I could make an order.
It was the end after that. Express went absolutely ballistic. The stock went from $1.30 to almost ten bucks a share over night. The rally lasted a week or so. Then the stock sold off again. To around $2.50 per share. Since then the stock has been range bound in the $2.50 range to $7.00 range.
I never re-entered since I was looking at the equity at under $1.00. Thought I was dumb for not making a move when no one thought the company would survive. Missed out and moved on. I mean I did all of the work but was just too slow on allocating capital. It was a terrible mistake that cost me a bunch of money.
Despite not taking a position, I have continued to follow Express. When you run a fully analysis on a company you should always keep tabs on them. Sometimes stock prices are overly optimistic. Sometimes they are overly pessimistic. As Ben Graham famously stated:
Mr. Market is an investor prone to erratic swings of pessimism and optimism. Since the stock market is comprised of these types of investors, the market as a whole takes on these characteristics. Graham's take is that a prudent investor can enter stocks at a favorable price when Mr. Market is too pessimistic. When Mr. Market is overly optimistic, investors may choose to look for an exit. Mr. Market creates ups and downs in stock prices all the time, and prudent fundamental investors are unfazed by them since they are looking at the larger, long-term picture.
Express is currently trading at $3.90 per share. Market cap is $263 million. There is $33 million in cash and $118 million in debt. Management still expects to receive $52 million of CARES Act receivable later in the year. The implied valuation of the entire firm is a mere $296 million.
In Q2 2021 Express generated $15 million in operating income and $30 million in EBITDA. The first time the company has generated operating income since Q4 2018. Annualize that EBITDA out and you have a company spitting off $120 million in EBITDA trading at only $300 or so million. At this valuation there is definitely a case to be made.
But let’s dig a little deeper. According to Express from their Investor Day Presentation, the management team is guiding to $155-180 million in EBITDA by 2024. This is on the back of $100-125 million in operating income. With $15 million in capex and $40-60 million in working capital, the business would be spitting $80-100 million in free cash flow.
If Express comes anywhere close to hitting these numbers a valuation of $300 million will look like cake. If Express starts spitting $100 million in free cash flow it doesn’t take much gumption to start trading in the $8-10 dollar range. The same range the infamous Will Meade was calling back in early 2021 when no one wanted to touch these names.
Given the current price action, which has been straight down since late August at $7.30 per share, I’m guessing Express is due for a quick reversion to the mean. Mr. Market has gotten too pessimistic, yet again.
Express isn’t going bankrupt anytime soon. COVID is basically over. And we are entering key holiday season where the Express concepts shine. Any incremental improvements should result in the stock re-rating, back to a normalized valuation, which I’m pegging in the $400-500 million market cap range.
Over the long-term, if the management hits their 2024 guidance the stock won’t be trading anywhere near these levels.
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