Express: From Meme Stock To Undervalued Gem

Express, Inc. (EXPR) was one of the OG meme stocks along with AMC, GME and KOSS last year as people were banking on a short squeeze. The stock ran from less than $1.00 to over $6.00 in the first half of 2021, with high correlation to GME and AMC's runs. Today it settled at $1.77, up 33% and has transformed from a meme stock with short squeeze potential into an undervalued gem. Why? Because of news of a deal between itself and WHP Global. WHP Global is the owner of Toys R Us. So it's a company with deep pockets and resources with experience with the challenges of running a retail chain in 2022.

WHP will invest a total of $260 million - $25 million to buy 5.4 million EXPR shares at $4.60 and $235 million into a joint venture where WHP will own 60% and EXPR will own 40%. What makes this deal interesting is that WHP laid down $260 million for a company that has only a $121 million market cap. It could have spent less money to buy EXPR out and own 100% of the joint venture along with the assets, branding and IP that was the driver behind this deal. We can't rule out that a buyout won't eventually happen. 

The CEO of WHP, Yehuda Shmidman, is so excited for this deal that he posted it on his LinkedIn profile. He certainly has big plans for the partnership with EXPR if he is so proud to show it off on social media. This could also be a precursor for a merger type of deal that sees WHP go public using the EXPR listing as a medium. We have seen plenty of M&A transactions light up a stock price in the short squeeze/meme stock world over the past couple of years. TRCH/MMAT/MMTLP being a recent example. But also with RDBX/CSSE, SPRT/GREE and BBIG/TYDE. 

There are two major differences between those examples and EXPR/WHP. First, WHP is backed by deep pockets and has friends on Wall Street. Those other three examples were renegade small cap deals with little Wall Street support. That was part of the charm baked into the meme stock world. That worked for the 2020-21 bull market when money was free flowing. That doesn't work so well in a high interest rate environment and small cap bear market. The "show me the money" type of deals like the one between EXPR and WHP might be the new reality for successful meme stocks. The other difference is that those aforementioned examples traded at ridiculous premiums at some point in time. For instance, RDBX traded more than 8 times higher than its proposed takeover price from CSSE. Both GREE and BBIG/TYDE have cratered mightily from peak hype since their deals were consummated. The jury is still out on TRCH/MMAT/MMTLP with some interesting activity expected next week. In contrast, EXPR is trading at an extreme discount to its deal. WHP just purchased shares at $4.60. It's putting in $235 million into a JV that's valued at $400 million and EXPR now has a 40% stake - just for putting in intellectual property and branding. EXPR's JV stake is worth $160 million, less than the stock price for the entire company. To put it into perspective, EXPR would have to reach $25 in order to have the same type of overvalued hype that RDBX did. 

WHP is not a stupid company. It didn't just invest at $4.60 to lose money. It fully expects that EXPR will trade at a higher stock price than that at some point in time in the near future, likely boosted by the JV. Keep in mind the timing of this deal too. We are in a bearish market, with small caps in particular getting slammed. Interest rates are high. A deal like this during peak bubble may have been more ho-hum. But WHP is looking around at today's economic reality and is STILL paying triple the current stock price to get a hold of 5.4 million EXPR shares. Why not just buy shares in the open market? 

EXPR has 6.33 million shares short, or about 10% of the float. This news must have caught shorts off guard, but lucky for them the stock managed to close under $2.00. So they have an opportunity to cover their position at a decent price before the joint venture comes into fruition or WHP decides that it would like more shares. If it's willing to spend $25 million for a 7.4% stake, we can't rule out that it will buy more shares on the open market at a substantial discount to the $4.60 price it paid. Now that the news is out, any blackout period for WHP to buy shares on the open market is over.