Sector financial performance:

This company, who primarily sells apparels for babies and children under their own brands, has been grouped into children apparel retailer sector in clothing industry.

The organic demand for apparel for babies, children, and young people has been strong as indicated by data that, while the comparable stores sales have been decreasing since 2015 (it seems that downward trend slowed down since 2017), the decrease has been completely offset by increase in e-commerce sales for most of companies (it seems that upward trend in ecommerce slowed down in 2017/18). Some of companies can still gain enough sales from their new stores to avoid significantly hurting their profitability, which often happens resulting from new store opening.

Generally, there has been an upward trend for gross margins of companies due to a shifting of sales to higher margin channels (e-commerce) and decreasing products costs. There is also an upward trend for SG&A spending while offset by leverage as sales increased. Based on 12 months trailing data of 2017, for companies who have their own brands the gross margins are between 38-43% (including impacts from different costs measurements) and operating margins are 9-12%. For company who have no their own brands, the gross margin is around 30% and operating margin 4%. However, as e-commerce sales growth slowed down with increasing shipping costs, companies’ margins including gross margin and operating margin decreased accordingly after entering 2018. And this probably we see the declining cash flow in 2018.

According our analysis, companies’ enterprise price/EBI is around 21.

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Company performance:

Data that comparable stores sales have kept decreasing at 2-5% rate but comparable e-commerce sales increased more than 20% annually before 2017. The increase in sales has come from faster increase in ecommerce than decline in in-store sales and increase in new opening. However, it seems increase in new opening and ecommerce ,which is the most driver for this company to increase its cash flow, slowed down since 2017 and wholesale decline due to its retail customers’ troubles.

First two quarters of fiscal 2018 compared with the 2017

The sales of this company increased about 1.9% (0.6% for 2Q) primarily attributable to about 2.1% from new opened stores and about 2.1% from ecommerce sales offset by about 1.4% from wholesale and by 1% from comparable stores sales.

Fiscal 2017 compared with the 2016

The sales of this company increased 6% primarily attributable to about 2.4% from new opened stores, about 2.5% from ecommerce sales, and about 0.9% from wholesale offset by 1.3% from comparable stores sales.  Comparable stores sales decreased 3.3% due to lower average transaction price and lower traffic. Comparable e-commerce sales increased 22% due to higher transaction price and more transactions.

The sales of this company increased 7.2% in the first 9 months of fiscal 2017 compared with the same period of 2016, primarily attributable to increase of about 5.4% from new opened stores and increase of about 5.3% from ecommerce sales offset by decrease of 3.3% from comparable stores sales.  Comparable stores sales decreased 4.3% due to lower average transaction price and lower traffic. Comparable e-commerce sales increased 22.5% due to higher transaction price and more transactions.

The sales of this company increased 8.9% in fiscal 2016 compared with 2015, primarily attributable to increase of about 6% from new opened stores and increase of about 4.5% from ecommerce sales offset by decrease of 1.5% from comparable stores sales.  Comparable stores sales decreased due to less transaction and lower price. Comparable e-commerce sales increased 20-25% due to more transactions.

The sales of this company increased 6% in fiscal 2015 compared with 2014, primarily attributable to increase of about 6% from new opened stores and increase of about 4% from ecommerce sales offset by decrease of 2.4% from comparable stores sales.  Comparable stores sales decreased due to less transaction and lower price. Comparable e-commerce sales increased 20-25% due to more transactions.

This company’ gross margins have increased from about 41% of 2014 to 43% of 2017 (distribution and occupancy costs excluded) primarily due to sales’ shifting to higher margin channels and lower products costs. Its gross margin continued to be improved to 44% in 2018.

Its operating margin as percentage of sales has gone up from 10% of 2014 to 12% of 2016 but down to 11% in 2017 as a result of increased SG&A as percentage of sales. Obviously, since comparable stores sales decrease the new opened stores may encounter the same pressure of sales. Therefore, it is very possible that new opened store dragged down the total company’s operating margin due to the slowly catching up of sales in new stores. due to improved gross margin in 2018, this company’s operating margin went up slightly to 11.5% in 2018.

Stock price

This stock currently has an enterprise price/EBI ratio of 20($97), which we think, is relatively overvalued considering that it may have a slower growth from e-commerce.