Sector financial performance:

This company, who primarily designs, markets, and distributes women’s apparel and accessories by whole sales and its own retail stores, has been grouped into women’s apparel sector in clothing industry.

The retail sales for women’s apparel seem to have been declining in the past several years all across the sector as indicated by continuing decrease in wholesale of apparel companies, which started from declining orders and then was hurt by reduced price of orders when companies had to lower price to maintain sale volume. Some of companies experienced more than 10% decrease in wholesale annually since 2015, which may be a reflection of decrease in comparable sales across the whole sector. In fact, those apparel companies’ own retail also experienced an average 3-4% annual decrease in their comparable sales in 2016/17.

However, 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 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.

In fact, there have been signals indicating that comparable sales are re-bouncing back in 2018 thanks to stronger demand, growth in e-commerce, and largely closure of low performance stores in the past several years. While the wholesale continued to decline since entering 2018 due to reduced orders probably as a result of store closures, it will eventually slow down as growth in e-commerce sales offset decline in in-store sales.

While unfavourable climate in retail industry certainly makes huge pressure on the profits of companies, which are usually very sensitive to changes in stores’ traffics and thus wholesales, women’s apparel companies, which have bigger margins because they usually sell more high end clothing with higher price, seem to still be able to keep high profitability. As we can see from a typical data, while companies in this sector have much higher SG&A as percentage of sales (around 50%, including occupancy costs) they can still manage to make a gross margin of 53% and keep their operating margin above 3%.

According our analysis, companies have an enterprise price/EBI of around 26  and enterprise price/sale of 1.5 with interest/EBI ratio of 4%

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Company performance:

Data indicated that the wholesale of this company has been decreasing in the past three years with a more than 10% rate annually. Our comparable stores sales data also indicates that average comparable sales in both this company’s stores and e-commerce have decreased during the same period. The significant decline in wholesale and ecommerce sales slowed down since late 2017 and we have seen large increase in comparable sales in2018 driven by bouncing back transaction.

The first three months of fiscal 2018 compared with same period of 2017 ( ended 20180505)

The net sales of this company decreased about 6%, primarily attributable to decrease of 15% in wholesale offset by increase of 12.3% in comparable sales (including e-commerce) due to increasing transactions.

Fiscal 2017 compared with 2016 (ended 20180203)

The net sales of this company increased about 1.6%, primarily attributable to increase of 4.5% in comparable sales (including e-commerce) due to increasing average unit and offset by

decrease of 2.3% in wholesale due to reduced orders.

The net sales of this company decreased about 7.4% in the first 6 months of fiscal 2017 compared with the same period of 2016, primarily attributable to decrease of 11.5% in wholesale due to lower price of order and offset by increase of 0.6% in retail primarily attributable to increase in non- comparable sales. Comparable sales decreased 3.3% due to decreasing average transaction size.

The net sales of this company decreased about 11.3% in fiscal 2016 compared with 2015, primarily attributable to decrease of 15.5% in wholesale due to lower price of order and decrease of 3.1% in retail primarily attributable to decrease in comparable sales, which decreased 16.2% due to both decrease in transaction counts and transaction size.

The net sales of this company decreased about 11.1% in fiscal 2015 compared with 2014, primarily attributable to decrease of 22.4% in wholesale due to lower volume and offset by increase of 25% in retail primarily attributable to increase of 4.2% in comparable sales due to increase in transaction counts and offset by decrease in transaction size.

This company’ gross margin is currently about 45% down from 49% in 2014 due primarily to reduced price. Due to deleverage of continuingly decreased sales, increased occupancy costs from new stores, and significantly increased costs in corporate management, its SG&A as percentage of sales has increased from about 29% to 51% in fiscal 2018. Therefore, this company’s operating margin as percentage of sales has gone down to about -5% from 21%.

Stock price

This stock currently has an enterprise price/sales ratio of 1.0. We think that its stock is being relatively overvalued considering that, while comparable sales growing positive once again, declining wholesale keeps hurting this company’s margin and cash flow. It may be very difficult for this company to pull its profitability to previous level.