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 American sales of this company had decreased fast in 2016/17 but presented a positive number in 2018 as indicated by its North American comparable sales in the 2016 (down by 4.5%), 2017(down by  12%), 2018 (up 2% so far).

The first six months of fiscal 2019 compared with same period of 2018(ended 20180804)

The organic sales of this company increased 10% (12% for 2Q) primarily attributable to its international retail expansion and international comparable sales and increase in wholesales to Europe.  Comparable sales in America retail increased 2% (3% for 2Q).

Fiscal 2018 compared with 2017(ended 20180203)

The organic sales of this company increased 5.3% primarily attributable to its international retail expansion and international comparable sales and increase in wholesales to Europe.  Comparable sales in America retail decreased 9%.

The organic sales of this company increased 4.5% in first half of fiscal 2018 compared with sale period of 2017 primarily attributable to its international retail expansion and increase in wholesales to Europe.  Comparable sales in America retail decreased 12%.

The organic sales of this company increased 1% in fiscal 2017 compared with 2016 primarily attributable to its international retail expansion. Comparable sales in America retail decreased 4.5%.

The organic sales of this company decreased about 1% in fiscal 2016 compared with 2015 primarily attributable to the decrease of 1.6% in America retail. Comparable sales in North America retail decreased 0.6% excluding currency impacts.

This company’ gross margins was about 31% (distribution included and stores rental costs included, royalty revenue excluded) down from about 33% of 2014 primarily due to prices’ markdown and deleveraging of operation related expenses as a result of decreased sales in America retail market, Its SG&A as percentage of sales has no changes and therefore, its operating margin went down from about 5.5% of 2014 to current 3.3%. However, driven reduced markdowns in US retail market and leverage of occupancy costs as a result of increase in sales, its gross margin is improved largely in 2018 (34%). With increased SG&A%, its operating margin back up to about 4% in 2018.

Stock price

This stock currently has an enterprise price/EBI ratio of 30 ($22.5). We think that its stock is being relatively overvalued considering its deceasing trend in its America retail sales and uncertainty in its bet on Europe market, which may follow the same trend as it is in America market.