Sector financial performance:

This company, who primarily buys and sells off-price accessories and casual clothing for men and women mainly through their retail stores, has been grouped into casual clothing retailers (off-price) sector in clothing industry.

There was a clearly downward pressure on stores sales for companies in this sector in 2016 and 2017as indicated by our data that average comparable stores sales decreased by 0.5% and 2% in 2016 and 2017 respectively as compared with increase of 2% in 205. Some of companies in this sector presented stronger resistance to sales pressure than other full-price apparel retailers probably due to better performance of merchandises other than apparels such as home fashion and accessories.

As many companies in other sector, companies in this sector have also been seeing rebounding sales since 2018 driven by coming back traffic accompanies with less discounting. It seems that e-commerce has a very limited impact on this rebounding of sales in this sector.

It seems that, compared with full price apparels, the demand for off-price apparels seems to be more sensitive to economy elastic of price so that those companies’ sales have been supported by lowering price. As a result of price deflation (promotion/markdowns), companies’ gross margins decreased up to 500 basis points with an average decrease of 200 basis points in 2015/17. Plus the deleveraging of SG&A costs as a result of decreased sales, companies’ operating margins decreased by an average of 370 basis points during the same period. However, as sales jumped up with stronger demand in 2018, we have seen the improved gross margin driven less discounting and improved SG&A% driven leverage of expense.

The current average gross margin is 33% in this sector (distribution costs and occupancy costs included) with an average SG&A as percentage of sale of 28%. And this makes an average operating margin of 6%.

According our analysis, companies’ enterprise price/EBI ratios are 29 with interest/EBI ratios of 1%.  Companies’ enterprise price/sales ratios is about  1.0.

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Company performance:

Data indicated that demand was still strong and sales of this company have been supported by reduced price as indicated by the basically flat comparable stores sales in 2016 and 2015 when many of its peers suffered. Not surprisingly, when the whole apparel retail market recovered since 2017, we have seen strong rebounding from its comparable sales accompanied with less reduction in price in 2017 and 2018.

First half of fiscal 2018 compared with the same period of 2017

The net sales of this company increased about 7.3% (9% for 2Q) primarily attributable to the comparable stores sales increase of 2.7% (3.3% for 2Q).

Fiscal 2017 compared with 2016

The net sales of this company increased about 7% primarily attributable to new stores opening and as well to the comparable stores sales increase of 4.5% ( home products mainly ) including increase in transactions and in transaction size (unit of items). Price was flat.

The net sales of this company increased about 5% in first 26 weeks of fiscal 2017 compared with sale period of 2016 primarily attributable to new stores opening and as well to the comparable stores sales increase of 2.6% ( home mainly ) including increase in transactions and in transaction size and decrease in average selling price.

The net sales of this company increased about 1.7% in fiscal 2016 compared with 2015 primarily attributable to new stores opening offset by decrease of 0.4% in comparable stores sales including increase in transactions and in transaction size and deep decrease in average selling price.

The net sales of this company increased about 1.9% in fiscal 2015 compared with 2014 primarily attributable to new stores opening offset by decrease of 0.1% in comparable stores sales including increase in transactions and in transaction size and deep decrease in average selling price.

This company’ gross margins was about 36% (distribution included and stores rental costs included) in 2017 up from about 34.5% of 2014 primarily due to less markdowns and lower cost of products. Due to no changes in SG&A as percentage of sales, its operating margin went up by about 100 basis points to 2.7% in 2017. And as SG&A continued to be improved by leverage as a result of increasing sales, its SG&A% down to about 32% in 2018 and generated a 3.7% operating margin.

Stock price

This stock currently has an enterprise price/EBI ratio of 23 ($32). We think that its stock is being relatively fairly valued considering the strong demand for its products as indicated by the high elastic of price and its ability to pass on reduced price to suppliers