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.

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Company performance:

Data indicated that this company’s comparable store sales decreased about 8%, 4% and 1.5% for 2017, 2016 and 2015 respectively due to decrease both in average transaction size and transaction counts.  During this period, it seems that aggressive promotion was also not able to stop decreasing in sales due to reduced traffic. However, it seems that the downward trend in comparable sales slowed down in 2018, which presents 4.6% decline (3.2% decline for 2Q) for first half of 2018, probably due to less promotions/higher price.

The first 26 weeks of fiscal 2018 compared with same period of 2017 (ended 08042018)

The organic sales decrease about 4.8% primarily attributable to decrease of about 4.6% (3.2% for 2Q) in comparable sales due to decrease in transaction counts.

Fiscal 2017 compared with 2016

The organic sales (excluding extra week) decrease about 10% primarily attributable to decrease of about 8% in comparable sales in both transaction size and transaction counts.

Fiscal 2016 compared with 2015

The net sales decrease about 3.8% in fiscal 2016 compared with 2015, primarily attributable to decrease of 3.7% in comparable sales in both transaction size and transaction counts.

 

Fiscal 2015 compared with 2014

The net sales decrease about 1.2% in fiscal 2015 compared with 2014, primarily attributable to decrease of 1.5% in comparable sales in average transaction size.

This company’ gross margin has been around about 38% (buying and occupancy costs included) down slightly from 2017 primarily due to increase in e-commerce’s shipping costs and deleveraging of buying and occupancy costs as sales went down, offset by increase in merchandise margins. While reduced spending in advertising, the large decline in sales caused SG&A as percentage of sales up to about 32.5%. This company’s operating margin has been down to around 5%.

Stock price

This stock currently has a stock price/cash flow ratio of 16, which we think is relative fairly valued considering that while average spending per transaction the traffic’s downward trend may have to continue. (estimated $8-10$).