Sector financial performance:

This company, who primarily sells apparels for 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 indicated that comparable sales have kept increasing at around 5% annual growth rate since 2015 while there are no further information of drivers. However, it seems the growth in comparable sales is accelerating in 2018 driven probably by promotions.

First six months of fiscal 2018 compared with same period of 2017

The sales of this company (excluding extra week and acquisition) increased 6.5% (13% for 2Q) primarily attributable to increase of 5.1% (13% for 2Q) from comparable sales.

Fiscal 2017 compared with 2016

The sales of this company increased 4.8% primarily attributable to increase of 5.8% from comparable sales.

The sales of this company increased 2.5% in the first 6months of fiscal 2017 compared with the same period of 2016, primarily attributable to increase of 4.7% from comparable sales.

The sales of this company increased 3.4% in fiscal 2016 compared with 2015, primarily attributable to increase of 5% in comparable sales.

The organic sales of this company (excluding currency impacts) were flat in fiscal 2015 compared with 2014. Comparable sales increased about 0.4%.

This company’ gross margins (including buying and occupancy costs) increased slightly to 37.8% in 2017 and down to 37.5% in 2018 due to decrease in merchandise margins (sales’ shifting to lower margin e-commerce (increasing shipping costs) and markdowns). Its operating margin as percentage of sales has gone up to about 9% in 2017 partially due to costs leverage of closed stores but down back to 8% in 2018.

Stock price

This stock currently has a stock price/cash flow ratio of 21($130), which we think, is relatively slightly overvalued considering that its financial performance has been improved largely due to the closing of stores, growth in ecommerce fluctuated, and declining margins (increasing costs) while sales grows.