Sector financial performance:

This company, which is primarily a discount and value-priced retailer, has been grouped into discount stores – merchandise sector.

It seems that there has been a downward trend in stores sales as indicated by data of a typical retailer in this sector that growth in comparable sales slowed down straight in the past several years while the company has kept closing under-performed stores. However, in the second quarter of 2018 we see rebound comparable sales of 1.6% growth.

As a result of cost-cutting, we have seen small increase in gross margin of the typical company (around 41% in 2017). The typical operating margin was at about 6% with a SG&A as percentage of sales of about 35% in 2017. However, due to more markdowns and increasing operating expenses, we have seen a declining margin in 2018 as indicated by about 40.5% gross margin and 5% operating margin.

The typical average enterprise price/EBI ratio is: 12 (interest/EBI ratio of 5%) and stock price/sales ratio is about 0.4.

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Company performance:

It seems that the demand for products of this company in the past several years has been shrinking as indicated by the fact that, while more than 10 stores were closed annually, the growth in comparable sales has still been decreasing (from 1.8% to 0.4%) between 2015 and 2017. The comps continued to decline in the first of quarter of 2018 but rebound in the second quarter as indicated by a growth of 1.6% quarterly.

The first half of fiscal 2018 compared with same period of 2017 (ended 20180804)

Net sales (excluding extra week) decreased 1.6% due to decrease of 0.8% (up 1.6% for 2Q) in comparable sales and fewer stores (14 store closures).

The fiscal 2017 compared with 2016

Net sales (excluding extra week) increased 0% due to increase of 0.4% in comparable sales offset by fewer stores (16 store closure).

2016 compared with 2015

Net sales increased 0.2% due to increase of 0.9% in comparable sales offset by fewer stores (17 store closure).

Fiscal 2015 compared with 2014

Net sales increased 0.3% due to increase of 1.8% in comparable sales offset by fewer stores (11 store closure).

Its gross margin has increased by about 110 basis points to about 41% in 2017 due to lower distribution and merchandise costs. However, due to the flat increase in SG&A as percentage of sales (around 35%), its operating margin went up to about 6% in 2017. Gross margin declined in 2018 due to markdowns and, with higher SG&A% as a result of expenses increase including distribution and labor, the operating margin down to below 5% in 2018.

Stock price

This stock currently has an enterprise price/EBI ratio of 12 ($42). We think that its stock is being relatively slightly overvalued considering the shrinking margin while good news from sales.