Sector financial performance:

This company, who primarily buys and retails lifestyle/casual clothing for men and women mainly through their own stores and ecommerce sites, has been grouped into casual clothing retailers sector in clothing industry.

Between 2015 and 2018, 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 11% in 2016, 5% in 2017, and 1% in 2018. The sales declined quickly in 2016 driven by decreasing transactions while significant markdowns and discounting. However, since the second half of 2017 it seems that the decline in comparable sales of companies slowed down probably due to increasing consumers’ demand (traffic as indicated by rebounding price) and contribution from strong ecommerce performance.

As a result of price deflation (promotion/markdowns) and deleveraging of stores operating costs, companies’ gross margins decreased up to 600 basis points with an average decrease of 450 basis points in 2016 and 2017. Plus the deleveraging of SG&A costs as a result of decreased sales, companies’ operating margins decreased up to 800 basis points with an average of 650 basis points. We see companies’ sales and profitability in this sector were impacted much bigger than those retailers who own and manufacture for them own stores probably as a result of intensive price competition.

The current average gross margin is 32% (with a large range) in this sector (distribution costs and occupancy costs included) with an average SG&A as percentage of sale of 26%. And this makes an average operating margin of 6%.

According our analysis, companies’ enterprise price/EBI ratios are 13 with interest/EBI ratios of 0%.  Companies’ enterprise price/sales ratios are 0.2 with interest/EBI of 30%.

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Company performance:

Data indicated that casual apparels sales of this company had decreased fast in 2016/17 as indicated by decrease of 13% and 7% in comparable sales for 2016 and 2017 and as well by the decrease in online sales during the same period of time. However, it seems that the declining comparable sales hit the bottom and may be rebounding back up in the second quarter of 2018 as indicated by the increase of 1.3% quarterly. Online sales growth turned into positive number as well in 2018.

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

The net sales of this company decreased 0.5% (increased 2.8% for 2Q).  Comparable sales decreased 0.9% (increased 1.3% for 2Q). Online sales account for about 10% of stores sales and increase 7.3% (8.6% for 2Q).

Fiscal 2017 compared with 2016

The net sales of this company decreased 6.3% including extra week.  Comparable sales decreased 7.2% primarily attributable to decrease in both transaction counts and retail price. The decrease in average retail price is a reflection of sales shift among brands. Online sales account for about 10% of stores sales and decrease 1.6% including extra week.

The net sales of this company decreased 10.5% in the first 26 weeks of fiscal 2017 compared with the same period of 2016.  Comparable sales decrease of 10% primarily attributable to decrease in both transaction counts and retail price. The decrease in average retail price is a reflection of sales shift among brands. Online sales account for about 10% of stores sales and decrease 4.5%.

The net sales of this company decreased 13% in fiscal 2016 compared with 2015.  Comparable sales decrease of 13.5% primarily attributable to decrease in transaction counts and partially in retail price. The decrease in average retail price is a reflection of sales shift among brands and products. Online sales account for about 10% of stores sales and decrease 5.4%.

The net sales of this company decreased about 3% in fiscal 2015 compared with 2014.  Comparable sales decrease of 4.4% primarily attributable to decrease in transaction counts. Online sales account for about 10% of stores sales and increased 12%.

This company’ gross margins was about 41% (distribution included and stores rental costs included) in middle of 2017down from about 44% of 2014 primarily due to deleveraging of operation related expenses as a result of decreased sales, which in fact is also the reason that caused the SG&A as percentage of sales decrease. Therefore, its operating margin went down from about 22% of 2014 to 14%. However, due probably to rising price and thus merchandise margin since 2017, this company’s has been seeing improved gross margin (to 42%) and operating margin (about 15%) in 2018.

Stock price

This stock currently has an enterprise price/cash flow ratio of 13 ($23). We think that its stock is being relatively undervalued compared with its peers considering rebounding comps and its large space to further lower price.