Sector financial performance:

This company, who is primarily a retailer of women lifestyle shoes with third party brands, has been grouped in women lifestyle footwear retailer sector.

The average growth in comparable stores sales of typical retailers in this sector has been down from 1.5% to 0% since 2015. It seems the extent to which this downward trend has influenced on companies’ sales varies depending on products. Premium footwear products seem to have been less impacted. However, when demand (transactions) comes back as we have seen in the first half of 2018, those who were influenced deeper seem to be re-bouncing faster. Comparable sales increased about average 6-7% in 2Q of 2018 just a reflection of increasing transactions and higher price/fewer markdowns as traffic come back.

When facing the downward pressure in traffic before 2018, companies have tried to maintain their sales by either acquisition or expansion of stores. Many of them had to lower price. As companies’ comparable sales bouncing back, while still struggling with wholesale, they have seen improved margins in 2018. The typical gross margin is about 42% (excluding distribution and occupancy costs) and 29% (including distribution and occupancy costs). With average SG&A as percentage of sales of 30%, the average operating margin is about 6% in 2018 (12 months trailing data).

According to our analysis, the current companies’ enterprise price/EBI ratio is around 20 with interest/EBI ratio of 8%.

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Company performance:

The growth in comparable store sales seems to be declining since 2016 (1-3% decreased annually). The increase in sales has been driven by new store opening at the cost of lower margins during this period. However, comparable sales jumped up in 2018 and drive sales to grow significantly.

The first six months of fiscal 2018 compared with the same period of 2017

Organic sales increased about 8%(9% for 2Q) primarily due to increase in non-comparable stores sales and increase of 5% (9% for 2Q) in comparable stores sales ( increase in transactions).

The fiscal 2017 compared with 2016

Net sales increased about 2% primarily due to increase in non-comparable stores sales. Comparable stores sales decreased about 0.3%.

The first nine months of fiscal 2017 compared with the same period of 2016

Net sales increased about 2% primarily due to increase in non-comparable stores sales. Comparable stores sales decreased about 0.9%.

Fiscal 2016 compared with 2015

Net sales increased about 3.5% primarily due to increase in non-comparable stores sales. Comparable stores sales decreased about 3%.

Fiscal 2015 compared with 2014

Net sales increased about 5% primarily due to increase in non-comparable stores sales. Comparable stores sales increased about 0.9%.

Its gross margin (including distribution and occupancy costs) has decreased by about 230 basis points since 2014 to about 28% of fiscal 2017(trailing 12 months) primarily due to lower merchandize margin and deleveraging of expenses related to new opened stores. During the same time, its SG&A as percentage of sales increased by about 120 basis points as a result of increasing spending in marketing and this caused this company’s operating margin down by about 300 basis points to 6% in 2017. However, as comparable sales jumped and less markdowns in 2Q of 2018, gross margin was improved to about 29% in 2018 and, with slightly higher SG&A%, operating margin back up to 6.5%.

Stock price

This stock currently has an enterprise price/EBI ratio of 21. We think that its stock is being relatively slightly overvalued considering that its ratio and the stability in growth in ots comparable store sales in the past three months.