This Retailer Has Exited the Express Lane

In most economic environments, it would make sense to invest in an apparel company that targets twenty-somethings. This age group often dresses to impress, whether at work, in a social setting, or attending a special event. One of the top names in this slice of the retail sector is Express (EXPR) , which largely owes its success to this key demographic. However, there is one big problem.

Recent results
If you look back to earlier in the year, to the first quarter, then you will see that Express had a moderate year-over-year sales increase of 3%, and a diluted earnings-per-share of $0.38, which was lower than the year-ago quarter's $0.47. Express pointed to external headwinds that have led to lower foot traffic in malls. By reading the 10-Q, you might be able to tell the company felt the outlook was bleak. Then, Express' second quarter report seemed a lot more optimistic.

In the second quarter, net sales jumped 7%, comps increased 6%, and diluted EPS improved 11% to $0.20. Express attributed this success to growth in e-commerce and trend-right products. The only real negative for the quarter was a decline in gross margin to 31.4% from 32.2% due to increased promotional activity and increased rental expenses for two new flagship stores in New York City and San Francisco.

Looking ahead, Express expects fiscal year comps to come in at the low to mid-single digits. This would be an improvement over last year when comps were flat. Fiscal year EPS guidance is for $1.52-$1.60. This isn't overly exciting, as the top end of this range would match last year's results.

Now ... getting to that one big problem.

Twenty-somethings and the economy
This key demographic for retailers like Express has been hit particularly hard by the stagnant job market. The unemployment rate for ages 20-24 is approximately 13.3%. And in 2011, approximately 67% of college seniors had student loan debt of $26,600. It's no secret that this age group faces many headwinds. In some cases, these consumers must deal with college debt, which can take many years, if not decades, to pay off. College tuition prices have increased tremendously through the years, which has made this burden larger than in the past. As long as this debt exists, these consumers are less likely to spend extra on discretionary items.

Then there's underemployment. In the current economic environment, employers only pay skilled professionals well. The only way to become a skilled professional is via experience, so you're not going to find many twenty-somethings with a lot of industry experience, regardless of the industry. Therefore, they're not likely to be paid well. Of course, there will be exceptions to the rule, but it's not the norm. Most companies pay less than in the past because job seekers realize that jobs are difficult to come by and they will take whatever they can get.

The two above factors are headwinds for Express, and these headwinds need to be mitigated if Express is to build on the success it has had over the last few years

Express vs. peers
Abercrombie & Fitch (ANF) targets a similar consumer, perhaps slightly younger. Unlike Express, Abercrombie & Fitch is suffering from declining comps. In the second quarter, comps declined 11%, mostly due to competition.

However, I would think that the brand's decline due to a recent social-media nightmare regarding what type of people the company caters to would also have something to do with it. I have been bearish on this stock for months since that incident. Regardless of the reason, Abercrombie & Fitch has disappointed in six consecutive quarters. Therefore, this is like an open-book test -- it's not likely to outperform its peers at any point in the near future.

Urban Outfitters (URBN) is another similar player. However, it targets a wider array of consumers through its various brand stores, including Urban Outfitters (18-28 demographic), Free People (25-30), and Anthropologie (28-45). Like Express, Urban Outfitters is slowly expanding its store base. Also like Express, Urban Outfitters saw an impressive earnings improvement in the second quarter. In this case, EPS increased 21% to $0.51 thanks to optimized inventory and lower merchandise markdowns.

Conclusion
Express might have seen some recent improvements, and comps are expected to improve on a full-year basis. However, mall traffic isn't likely to improve, and Express' target demographic isn't suddenly going to turn around and begin buying discretionary items more aggressively. The American consumer needs wage gains and decent jobs for retailers like Express to see sustainable stock price appreciation. While Urban Outfitters isn't likely to be resilient either, it at least offers a little more diversification since it caters to a broader range of consumers.

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