Does XpresSpa Have Enough Liquidity To Survive A Covid Recession?

XpresSpa Group (NASDAQ: XSPA) stock has been galloping after the company got the nod to conduct Covid-19 tests at the airports. And the company’s recent $40 million capital raise should give them the flexibility to deal with a possible Covid induced recession. The company has gained a massive 17x since mid-March with the company’s existing business model, which includes spa services at airports, suffering due to the travel restrictions imposed across the globe. A Covid recession will impact the company’s revenues, cash flows, and other liquidity reserves.

Trefis analyzes the Impact Of The Covid-19 Recession On XpresSpa in an interactive dashboard with a focus on the company’s liquidity reserves and concludes that the recent direct equity offering of $40 million should be more than enough for the company to tide over the Covid recession.

We estimate that a recession that persists through late Q3/early Q4 2020 can reduce the company’s revenues by 50% from $48 million in 2019 to $24 million in 2020. Fading consumer demand, reduced discretionary spending, and stay-at-home orders continue to take their toll on the leisure industry.

Impact On XpresSpa’s Revenues 

• We estimate that a recession that persists through late Q3/early Q4 2020 can reduce the company’s revenues by 50% to $24  million in FY2020.
• If the outbreak gets worse, XpresSpa will have to keep its spa stores closed at all airport locations until the situation improves. Since the company offers close contact services including spa services, massage, nail, and skincare, the company’s revenues are likely to take a steep hit in FY’20.
• Even with the slow reopening of the economy as lockdowns are beginning to lift, social distancing measures may continue for months which will impact the company’s business.
• However, the company has signed a contract with JFK International Air Terminal to test its concept of providing diagnostic Covid-19 tests. The site will host nine separate testing rooms with a capacity to administer over 500 tests per day. If the company’s trial remains successful, this will help to mitigate the loss of revenues.

Impact On XpresSpa’s Cash Flows

• XpresSpa’s cash flows are likely to fall in FY2020 due to a steep reduction in revenues and a hit to profitability.
• Elevated fixed costs, coupled with lower revenues, will hurt the company’s bottom line.
• However, the company’s decision to transform (a new business that will conduct Covid-19 tests) its business will partially offset the impact on the company’s bottom line.

Despite this transformation, we estimate that Free cash flow from operations (FCFO) will go down from -$0.1 million in FY2019 to around -$5.7 million in FY2020. Also, with expected capital expenditures of $1.6 million for the year, FCFO-CapEx will be -$7.3 million in FY2020.

Cash Balance Impact

• Taking all these factors together, we estimated that XpresSpa will end the year with a cash balance of $3.4 million before the company raised fresh equity capital of $40 million – a move that will considerably boost the year-end cash balance.
• While the company has taken the necessary steps to transform its business, a cloud of uncertainty prevails over the feasibility of this new venture.

Conclusion

To sum things up, XpresSpa can weather a recession through Q3/Q4 and a 50% decline in revenues by cutting Capex, establishing a new venture, and raising over $48 Million in new capital.

Our dashboard forecasting US Covid-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus.

Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture. Additionally, the complete set of coronavirus impact and timing analyses is available here.

An alternative scenario for XpresSpa cash flows with a 30% decline in revenue instead is detailed as a part of our full analysis.

While XpresSpa has some questions, consumer discretionary company, Abercrombie & Fitch is looking solid.

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