Sector financial performance:

This company, who primarily designs, sources, markets, and retails casual clothing for men and women mainly through their own stores and ecommerce sites, has been grouped into branded lifestyle apparel sector in clothing industry.

Between 2015 and 2017, there was a clearly downward but slowing trend on comparable stores sales for companies in this sector as indicated by our data that average comparable sales decreased by 4% in 2016 and 0.5% in 2017. While the demand for products of some companies seemed to be more sensitive to reduced price and those companies’ sales had been able to be supported by lowering price (decreases in comparable sales have been kept flat or lower signal digit ), many companies’ comparable sales have declined at double digit rates with lowering price during this period and every company in this sector had been experiencing huge pressure on their sales due to slowing down stores traffic as indicated by their decreased transactions.

However, since the second half of 2017 it seems that the decline in comparable sales of companies hit the bottom and rebounded and the rebounding continued into 2018, which presents an average 3% growth so far in 2018. Companies’ performance in e-commerce seemed to be much better than those in stores since 2015. And the continuously strong growth in e-commerce finally has a positive impact on companies and become the major driver behind the positive comparable sales number of many companies in 2018. Gradually recovery of traffic and thus the increasing space for raising price also contributed to reversing sales.

As a result of price deflation (promotion/markdowns) in 2015/17, companies’ gross margins decreased up to 560 basis points with an average decrease of 200 basis points. Plus the deleveraging of SG&A costs as a result of decreased sales, companies’ operating margins decreased up to 650 basis points with an average of 320 basis points before the first half of 2017. The average gross margin was 28% in this sector (distribution costs and occupancy costs included) with an average SG&A as percentage of sale of 25%. And this makes an average operating margin of 4.6%.  As sales growth came back since 2017, the average gross margin of companies went up above 29% and generated an average 5.5% operating margin in 2018.

According our analysis, companies’ enterprise price/EBI ratios are 14-30 (average 21) with interest/EBI ratios of 0-10%.  Companies’ enterprise price/sales ratios are 0.4-1.1 (average 0.7).

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Company performance:

Data indicated that casual apparels sales of this company have increased in the past four years but the growth slowed down in 2015/17 but seems to be going back on track in 2018 as indicated by comparable sales increase of 9% driven by traffic, transaction, size and price. Growth in its comparable sales turned into negative in fiscal 2017 under the pressure of men’s apparels sales and come back.

First six months of fiscal 2018 compared with 2017(ended 20180804)

The net sales (excluding extra weeks) increased about 8% primarily attributable to comparable sales increase of 9% due to increasing traffic, transactions, transaction size and price.

Fiscal 2017 compared with 2016

The net sales increased 5% primarily attributable to comparable sales increase of 4%  due to increasing transaction.

The net sales of this company increased 2% in the first 26 weeks of fiscal 2017 compared with the same period of 2016, primarily attributable to comparable sales increase in products other than clothing. Comparable sales of clothing decreased 1% including decrease of 4% in men’s apparel offset by increase of 1% in women’s.

The net sales of this company increased 2% in fiscal 2016 compared with 2015, primarily attributable to comparable sales increase of 3% in apparel products and others. Comparable sales of clothing increased 1% including decrease in men’s apparel offset by increase in women’s. Transactions decreased and E-commerce continues growing.

The net sales of this company increased 7% in fiscal 2015 compared with 2014, primarily attributable to comparable sales increase of 7% in clothing. Comparable sales of clothing increased faster in women’s apparel than in men’s apparel.

This company’ gross margins is currently about 32% (distribution included and stores rental costs included) up from about 31% of 2014 primarily due to higher merchandises margins ( less markdowns offset by increasing promotion in 2017). As a result of increased sales, the SG&A as percentage of sales decreased about 100 basis points in the past four years and its operating margin went up by 250 basis points to 9% in 2018.

Stock price

This stock currently has an enterprise price/EBI ratio of 19 ($24.5). We think that its stock is being relatively fairly valued compared with its peers.