Sector financial performance:

This company, who primarily sells women’s intimate and other apparel, personal care, and beauty products under their own brands, has been grouped into women’s intimate apparel retailer sector in clothing industry.

As our data indicated, there is an apparent downward trend in the comparable sales for women’s intimate apparels in the past three years. The growth in comparable sales went down from 6% in 2015 to -14% in 2017 due to slowing down traffic. However, the decline in comparable sales has slowed down since then, we see it presented a flat decline in 2018 due to large growth in direct sales and maybe improved traffic/less promotion.

We are not sure what exactly cause the decrease. However, 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%.

It seems that, before the promotion is able to help halt the decrease in traffic and thus the sales, it already hurt companies’ margin significantly. However, further promotion seems to still be necessary if the unfavourable trend in retail industry continues. And it seems it is still too early to worry about cash flow issues at this moment since companies in this sector have relatively higher margins than other women’s apparels companies.

As we can see that a typical gross margin is 39% with a SG&A of 26% making an operating margin of 13%.

According our analysis, the enterprise price/EBI ratio for a typical company is 13 with interest/EBI ratio of 30%.

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Company performance:

Data indicated that there is apparent downward trend in sales of this company’s intimate apparels as indicated in growth in comparable store sales, which has decreased since 2015 and turned into negative ( -14%) in fiscal 2017. However, the downward trend seems to be slowing down since second half of 2017 until 2Q of 2018, which presents about 1% increase in terms of comparable sales in this category. Comparable sales for its beauty and personal care products have increased at about 5-9% annually.

First six months of fiscal 2018 compared with same period of 2017(ended 20180804)

The net sales increased 8%( 8% for 2Q) primarily attributable to both increase in intimate apparels sales offset  and in beauty and personal care products. Comparable sales (including retail and wholesale) for intimate apparels was flat (-1% for 2Q) probably driven by increase in direct sales and slowing down decline in in-store comparable sales (5% compared with 8% of 2017). Comparable sales increased 9% (10% for 2Q) for beauty and personal care products.

Fiscal 2017 compared with 2016(ended 20180203)

The net sales was almost flat primarily attributable to decrease in intimate apparels sales offset by increase in beauty and personal care products. Comparable sales (including retail and wholesale) for intimate apparels decrease 8% due to decrease in traffic/ transactions and exit of some categories. Comparable sales increased 5% for beauty and personal care products due to increase in transaction size/units.

The net sales decrease about 6% in the first half of fiscal 2017 compared with the same period of 2016, primarily attributable to decrease of 12% in intimate apparels sales offset by increase of 5% in beauty and personal care products. Comparable sales (including retail and wholesale) for intimate apparels decrease 14% due to decrease in traffic and transactions and exit of some categories. Comparable sales increased 4% for beauty and personal care products due to increase in transaction size.

The net sales increase about 3% in fiscal 2016 compared with 2015, primarily attributable to increase of 1% in intimate apparels sales and increase of 7% in beauty and personal care products. Comparable sales (including retail and wholesale) for intimate apparels have no changes. Comparable sales for beauty and personal care products increased 6% due to increase in transaction size.

The net sales increase about 6% in fiscal 2015 compared with 2014, primarily attributable to increase of 6% in intimate apparels sales and increase of 7% in beauty and personal care products. Comparable sales (including retail and wholesale) for intimate apparels increased 5% due to increase in both transaction size and transaction counts. Comparable sales for beauty and personal care products increased 7% due to increase in transaction size and transactions.

This company’ gross margin is currently 39% (buying and occupancy costs included) down 300 basis points from 2014 as a result of change in merchandize margins /promotions and deleverage of buying and occupancy costs. Due to deleveraging of decreased comparable sales and increased marketing costs, this company’s operating margin went down to about 12% in fiscal 2018 from about 17% of 2014.

Stock price

This stock currently has an enterprise price/EBI ratio of 13. We think that its stock is being relatively undervalued compared with its peers at the current climate of apparel retailers industry.