Sector financial performance:
This company, who primarily sells women’s apparel and accessories with their own brands and targets at women over 40 years old, has been grouped into women’s apparel retailer (over 40 years old) sector in clothing industry.
As our data indicated, almost all of retailers in this sector have been experiencing straight decrease in their comparable sales numbers since 2015. The decrease rate has reached average 7% in 2016/7. What caused more concerns is that comparable sales continued declining while companies significantly lowered down their products’ price. It seems that sales are not or less sensitive to price so that companies often experienced decrease in both volume and selling price. Sales from ecommerce seems to grow fast (some of company offer around 30% growth rate). However, ecommerce sales are usually accounting for only 2-3% of total sales in this sector and not able to offset the loss of those companies from their stores.
However, starting from 2018, some of companies have been seen to be able to re-raise price/less discounting without further hurting traffic, which, together with strong growth in e-commerce, has resulted in slowing down or even reverting of a downward trend in their comparable sales. While there is a positive signal rising in this sector, many companies in this sector seem to still be struggling with traffic and worsen cash flowing resulted from discounting.
In addition, we are still trying to figure out what exactly cause the decrease in sales. As we had discussed, there are no apparent evidences to prove that the decline in sales of women’s apparels has derived from decrease in demand for those products since we did not see any fundamental changes in factors such as macroeconomy or consumers’ lifestyle. We think the decrease in sales is from the general decrease in traffic, which has been a result of less in-store shopping activities as many shopping activities are being replaced by online shopping. Therefore, the direct result is that for those products that consumers can buy online the sales move from in-store to e-commerce and for a small portion of those products that consumers do not like to buy online the sales may just go away. However, since consumers still need those products, while they are not buying as many as before due to reduced visits of stores, they still need them to maintain the basic demand. Therefore, we think the decrease in comparable sales for those apparels will not be permanent and it will slow down in 1-2 years when it hits another decrease of 10%.
Therefore, intensive markdowns of price and deleverage of costs as a result of decreasing sales significantly dragged down companies’ margins, which were already low, lower and even into negative number. As we can see that a typical gross margin range is between 27-38% with a SG&A range of 27-34% and the operating margin is between -7-5%.
According our analysis, the enterprise price/EBI ratio for a typical company with positive cash flow is 18 with interest/EBI ratio of 35%. The typical enterprise price/sales ratio for those companies with negative cash flow is 0.31.
Data indicated that this company’s comparable store sales have decreased about 2.6%,2.5%, 1% and 8% in the past several years reflecting general pressure on sales: with less promotion the comparable sales was dragged by significant decrease in transactions; when more promotion the increased transaction cannot offset the decreased transaction size.
Second three months of fiscal 2018 compared with same period of 2017
The net sales (excluding extra week) increase about 1%.
Stores counts decreased 3%.
Comparable sales increased about 0.8%.
E-commerce sales increased 15%.
First three months of fiscal 2018 compared with same period of 2017
The net sales (excluding extra week) decrease about 3%.
Average unit price increased about 6.2%.
Stores counts decreased 3.6%.
Comparable sales decreased about 2.6%.
E-commerce sales increased 8%.
Fiscal 2017 compared with 2016(ended 02032018)
The net sales (excluding extra week) decrease about 5.5%.
Average unit price decreased about 5.3%.
Stores counts decreased 6.4%.
Comparable sales decreased about 2.5%.
E-commerce sales increased 14%.
Fiscal 2016 compared with 2015
The net sales decrease about 0.6% in fiscal 2016 compared with the same period of 2015, primarily attributable to decrease in average transaction counts. The transaction counts decrease 5%, while offset by increase of 4% in average price, resulted in decrease of about 0.8% in comparable sales. E-commerce sales increased 16%.
Fiscal 2015 compared with 2014
The net sales decrease about 8% in fiscal 2015compared with the same period of 2014, primarily attributable to decrease of 6% in transaction counts and decrease of 2.5% in transaction size, which resulted in decrease of about 8% in comparable sales. E-commerce sales increased 24%.
This company’ gross margin is currently 27% (buying and occupancy costs included) down 520 base points from 2014 primarily due to price’s deflation and increased deleverage of buying and occupancy costs as a result of decline in sales. with deleveraging SG&A expenses as a result of reduced sales, this company’s operating margin as percentage of sales has gone down to about -6.5% so far.
This stock currently has an enterprise price/sales ratio of 0.1, which we think is relatively fairly valued considering that while it has no more space for further decrease in price the demand is still solid since the demand for its products still keeps sensitive to price. Given more cutting in SG&A or shutting down more stores thee is still an opportunity for its cash flow to come back positive.