Sector financial performance:

This company, who primarily sells merchandise and services including apparel and footwear, accessories, jewelry, beauty products, home furnishings and large appliances through its department stores and website, has been grouped into department stores sector in merchandise-clothing, household& furnishing, personal care industry.

All companies in this sector in our analysis have experienced decreased comparable stores sales (physical stores) between 2016 and the first half of 2017. Based on our data, the average growths of comparable sales (including online sales) are 0%, -2.3%, and 0.6% for 2017, 2016 and 2015 respectively. While the decrease in their comparable stores sales has been offset, to some extent, by the significant increase in comparable online sales, because the sales from e-commerce only account for a relative small portion compared with stores sales, the net sales for most companies have decreased during the same period.

However, it seems the decline in comparable sales hits a bottom in the second half of 2017 and made a turn to grow again since then driven faster growth in online sales, slower decline in transactions, and rebounding price/less markdowns. Our data indicates that average comparable sales had no changes in 2017 and gained about 2% in 2018 so far.

Under the pressure from decreasing traffic and sales, companies have to use aggressive promotion and as well shut down more inefficient stores. The resulted markdowns seems, as indicated by the decrease of about 100 basis points in gross margins of companies in the past three years, hurt companies’ profitability. The average gross margin in the first half of 2017 was  about 33.5% with a range in 30-39%. (33%- occupancy cost included and 34% -occupancy costs excluded).  At the same time, the average SG&A as percentage of sales (average 28% with a range 24-32%) decreased about 40 basis points du ring the same period due to deleverage of decreased sales. Therefore, we see the average operating margin went down to about 5.5% from about 7% of 2014 with a range of 2-7% (12 months trailing data, ended 20170731). The operating margin seems to have no change in the past year since the improved gross margin/rising price has been offset by increasing shipping expenses of online sales. However, we have seen solid growth in EBI in the past year and its huge potentials as continuously improving same store sales.

According to our analysis, the current companies’ enterprise price/EBI ratios vary between 13and 22 with an average 16.

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Company performance:

The increase in net sales of this company has been driven by its quick growth in e-commerce (annual rate of 20-30%), especially from its off-price online sales in the past several years. Comparable stores sales (physical stores) have kept decreasing with 3-6% rate (full-price stores) since 2015 but the decline seems to be slowing down in 2018, which help this company to regain a positive comparable sales in first half of 2018 (2.4% growth).

The first six months of fiscal 2018 compared with 2017(20180804)

Net sales increased about 6.5% (7.1% for 2Q) (including impact of less weeks and new standard) primarily due to increase in online sales and new stores opening. The comparable sales (including e-commerce, full price and off price) increased 2.4% (4% for 2Q) including increase of 31% in online sales in both full-price and off-price.

The fiscal 2017 compared with 2016

Net sales increased about 4.4% primarily due to increase in online sales and new stores opening. The comparable sales (including e-commerce, full price and off price) increased 0.8% including decrease of about 2-4%% in comparable store sales (physical stores) offset by increase of 13-25% in online sales in both full-price and off-price.

The first nine months of fiscal 2017 compared with the same period of 2016

Net sales increased about 2.7% primarily due to increase in online sales and new stores opening. The comparable sales (including e-commerce) has no changes including decrease of about 5% in comparable store sales (physical stores) offset by increase in online sales in both full-price and off-price.

Fiscal 2016 compared with 2015

Net sales increased about 2.9% primarily due to increase in online sales and new stores opening. The comparable sales (including e-commerce) has decreased 0.4% including decrease of about 6% in comparable store sales (physical stores) offset by increase in online sales in both full-price and off-price.

Fiscal 2015 compared with 2014

Net sales increased about 7.5% primarily due to increase in online sales. The comparable sales (including e-commerce) has increased 2.7% including decrease of about 1% in comparable store sales (physical stores) offset by huge increase in online sales in both full-price and off-price.

Its gross margin (including distribution and occupancy costs) has decreased by about 170 basis points since 2014 to about 36% of fiscal 2017(trailing 12 months) as a result of increasing promotion and markdowns activities. As SG&A as percentage of sales increase by about 150 basis points primarily due to expenses from new stores opening, this company’s operating margin went down to 6.6% in 2017. Gross margin was improved in 2018 as less markdown and discounting and leverage of increased sales. However, due to the continuously declining SG&A% as probably a result of shipping costs of online sales, its operating margin down to 6% in 2018. EBI/share increased (about 7% annually) during this period probably as a result of increase in sales offsetting shrinking margins.

Stock price

This stock currently has an enterprise price/EBI ratio of 22 ($66). We think that its stock is being relatively fairly valued considering that this high ratio can be justified by its strong performance in online sales, which we think will be sustainable.