Sector financial performance:

This company, which is primarily a children’s book publisher and direct seller, has been grouped into children’s book sector in book industry.

It seems that demand for children’s books of companies in this sector, according to the typical company data, has been strong as indicated by quick growth in revenue in the past several years, which, while seems to have been driven by increasing sales force, may be a reflection of strong demand for children’s books. While slowing down traffic of mall/stores dragged down sales, other explanations other than natural demand, such as retail channels verse direct sales, cannot alone explain why we have also seen the consistent increase in online sales of those companies.

However, we have to admit that the direct sales model or online sales do have helped enlarge customer base and facilitate their purchasing actions, which otherwise may not be completed in the traditional store channels, as indicated by the largely increased orders in the past three years according those companies’ data.

Booming revenue has been leveraging expenses of products. However, operating expenses also increased primarily due to less shipping charges.  Therefore, companies in this sector have been seen improved gross margin and rising SG&A as percentage of sales in the past several years. The typical gross margin and the typical SG&A percentage of sales is 74% and 67% separately. The gross margin increased slightly to 7% according 2018 data.

The typical price/cash flow is 19.

                                                                                                       click for reading more about this industry

Company performance:

It seems that the demand for children’s books of this company has been solid. While its growth in revenue seems to have been driven by its direct sales channels and its wholesale to retailers declines, the strong increase in online sales (under direct channels) prove that demand has not been declining.

The first nine months of fiscal 2018 compared with the same period of 2017

Direct sales increased 16% due to increase of 19% in active sales force.

Wholesale to retailer decreased 10% due to decrease in both order size and orders.

The fiscal 2017 compared with 2016

Direct sales increased 84% due to increase of 32% in sales force and increase of 111% in orders offset by decrease of 20% in size per order.

Wholesale to retailer decreased 15.5%.

Fiscal 2016 compared with fiscal 2015

Direct sales increased 138% due to increase of 151% in sales force and increase of 398% in orders offset by decrease of 48% in size per order.

Wholesale to retailer decreased 5% due to decrease in sale to national chain stores.

Its gross margin (including products costs only) has gone up from 61% to 74%since 2015 mainly due to leveraging of expenses with quickly increased sales. And with the largely raising SG&A as percentage of sales (to around 67%), which probably is a result of reduced shipping charges, its operating margin went up to only 7% in 2018.

Stock performance

This stock currently has a stock price/cash flow ratio of 20. We think that its stock is being relatively undervalued considering sustainability of the growth in its revenue of children’s books.