Sector financial performance:

This company, who primarily designs, sources, markets, and retails casual clothing for men and women mainly through their own stores, ecommerce sites, and wholesales, 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 adult casual apparels sales of this company have decreased in 2015/17 as indicated by its negative growth in comparable sales while it seems that the comparable sales related to its teen apparels did not decrease. However, demand seems to be coming back since the second half of 2017 as indicated by increasing comparable sales.

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

The net sales of this company increased 9% (8% for 2Q) primarily attributable to comparable sales increase of 4% (3% for 2Q) due to increased units sold and higher price.

Fiscal 2017 compared with 2016

The net sales of this company increased 5% primarily attributable to comparable sales increase of 3%.

The net sales of this company decreased 2% in the first 26 weeks of fiscal 2017 compared with the same period of 2016, primarily attributable to comparable sales decrease of 2% including decrease of 8% in comparable sales of products for men and women offset by increase in comparable sales in teen products.

The net sales of this company decreased 5% in fiscal 2016 compared with 2015, primarily attributable to comparable sales decrease of 5% related to products for men and women.

The organic net sales of this company decreased 2% in fiscal 2015 compared with 2014, primarily attributable to comparable sales decrease of 3%.

This company’ gross margins was about 8% (depreciation, distribution and stores rental costs included) in 2017 down from about 10% of 2014 primarily due to promotion and deleveraging of increased stores costs. As a result of deleveraging of decreased sales, the SG&A as percentage of sales increased about 200 basis points during this period and its operating margin went down from about 4% of 2014 to -0.5% in 2017. However, as sales started to increase since 2017 we have seen a large improvement in leverage of store related expenses, which improved the gross margin back to 10% and the operating margin back above 3%  with lightly increase in SG&A in 2018.

Stock price

This stock currently has an enterprise price/EBI ratio of 20($20). We think that its stock is still being relatively slightly undervalued considering that its much lower gross margin compared with its peers gives space for this company to significantly improve its earning as sales’ growth comes back again.