Sector financial performance:

This company, who primarily sells apparels for young people and children under third party brands, has been grouped into children apparel retailer sector in clothing industry.

The organic demand for apparel for babies, children, and young people has been strong as indicated by data that, while the comparable stores sales have been decreasing since 2015 (it seems that downward trend slowed down since 2017), the decrease has been completely offset by increase in e-commerce sales for most of companies (it seems that upward trend in ecommerce slowed down in 2017/18). Some of companies can still gain enough sales from their new stores to avoid significantly hurting their profitability, which often happens resulting from new store opening.

Generally, there has been an upward trend for gross margins of companies due to a shifting of sales to higher margin channels (e-commerce) and decreasing products costs. There is also an upward trend for SG&A spending while offset by leverage as sales increased. Based on 12 months trailing data of 2017, for companies who have their own brands the gross margins are between 38-43% (including impacts from different costs measurements) and operating margins are 9-12%. For company who have no their own brands, the gross margin is around 30% and operating margin 4%. However, as e-commerce sales growth slowed down with increasing shipping costs, companies’ margins including gross margin and operating margin decreased accordingly after entering 2018. And this probably we see the declining cash flow in 2018.

According our analysis, companies’ enterprise price/EBI is around 21.

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Company performance:

Data indicated that growth in comparable stores sales have turned into positive in 2017 presenting about 2% in 2018 so far after continuous decline before 2017.  Growth in e-commerce sales (between 11-20% annually since 2015) slowed down in 2017 but rebounded in 2018 presenting about 5% growth in 2018.

First six months of fiscal 2018 compared with 2017

The sales (excluding extra week) of this company increased 2.2% (4.5% for 2Q) primarily attributable to increase of 2.4% (4.4% for 2Q) from comparable sales including e-commerce sales (5%, 17% for 2Q).

Fiscal 2017 compared with 2016

The sales of this company increased 1.4% primarily attributable to increase of 1.0% from comparable sales including decrease of 2.5% in e-commerce sales.

The sales of this company increased 1.2% in the first 6months of fiscal 2017 compared with the same period of 2016, primarily attributable to increase of 1.4% from comparable sales including increase from e-commerce sales.

The sales of this company increased 3.3% in fiscal 2016 compared with 2015, primarily attributable to increase in non-comparable store sales. Comparable store sales decreased 1% and e-commerce sales increased 11%.

The sales of this company increased 6.3% in fiscal 2015 compared with 2014, primarily attributable to increase in non-comparable store sales. Comparable store sales decreased 1% and e-commerce sales increased 19%.

This company’ gross margins (including buying costs and stores rental costs) has no changes basically at about 30% before 2017 but went up to 31%in 2018.

Its operating margin as percentage of sales has gone down from 4.4% of 2014 to 3.4% of 2017 but rebounded back to 6.5% in 2018 as a result of improved SG&A as percentage of sales.

Stock price

This stock currently has an enterprise price/EBI ratio of 21 ($19), which we think, is relatively undervalued considering that, while it has no its own brand limits its ability to generate profit and makes it more vulnerable to downturning sales, its flexibility in buying and growing e-commerce matter.