Retail Clothiers (a Bombed out Sector?)

[GregS]

Anyone looking at AEO?  Seems to be bringing some stability to core biz, possible growth with Aerie.  The market didn't like their recent earnings, however, and I'm not sure I want to be in mall-based retail.  Any thoughts?

[ccplz]

I've started looking at the sector lately and have on a list some of the same companies others have. BKE, GES, and RL.  A couple that hasn't been mentioned yet that I'm trying to figure out is JCP and the head scratcher ASNA

 

I don't feel ASNA is a buy yet due to lowered guidance earlier this week.  It looks like their debt is very manageable since the bulk of the debt due to the Ann Taylor purchase a couple of years ago isn't due until 2021 I believe. Cash flows seemed very reasonable to service the debt and payoff the debt coming due until then.  Not sure now how cash flow will look like with the revision.  Would not be surprised if some of the Ann Taylor purchas it written off.  On the bright side they are working on their issues trying to make the move to omni channel for all store. 

 

Also, from asking around some of the customers are very loyal particularly with Lane.  Maybe it's just my age group but most people I talk to go into the stores to try things on and make sure the sizes are right.  Most of them will purchase in the store.  Some will order online from the same store once they are comfortable with the sizing.

 

ASNA equity is a 0.

 

Why?

 

Top-line is deteriorating due to full penetration of portfolio of tired brands, combined Nov / Dec comps declined 4.4% (however they had to increase promotions to drive comps) with pre-Christmas comps (i.e. first three weeks of Dec) down 10-17%

Profitability is now concentrated in one brand (maurices, ~62% of profitability) which has reached penetration and as the brand moves online, will face significant competition from ecommerce players

Justice, historically the Company’s second PNL generator, has collapsed under increased competition and a turnaround is unlikely given pricing pressure and erosion of store-base competitive advantage

All of ASNA’s other brands are fully penetrated and contribute limited profitability

Significant actual and implied leverage creates a very levered entity that drives significant decremental margins on small downward changes in sales (and vice-versa)

Company put on significant leverage for its last acquisition and currently sits on $2B leverage on $580M of EBITDA (i.e. 3x+) which is a lot for a brick-and-mortar retailer, most of the public comps don’t even have debt (with far better top-line trends)

In addition, ASNA has 4 concepts across 750+ stores which creates structural issues in world increasingly shifting to e-commerce

Assumed lease payments of this $750M capitalized at 10x imply leverage of 5.5x+

This is an overleveraged retailer with tired brands in structural decline that could be facing negative cash flow in 2-3 years - just screams structural short.

 

Regarding the leverage, 1.5 billion is not due until 2022.  That is a ways off before they even have to really worry about the balloon payment.  They are currently working in revamping the company and cutting the expenses. 

 

The entire retail sector is in the toilet and driving down sales as companies struggling to survive are cutting prices to get people in the store.  Those that can weather the storm will pick up a lot of new business as the weaker ones go out of business.  The term loan has been prepaid in that  another payment is not due until May 2018 (I believe).  This gives them time to implement "Change for Growth".  They have quite a few levers that can be pulled to stay afloat until better times come.  Despite what others would have people think, the entire country is not going to shift to only ecommerce.

 

Am I saying it's a buy right now?  No, for one the price is higher then I want to pay relative to valuation.  They have some goodwill write offs coming up.  can also think of a couple other things that need to be done.  Hopefully on the earnings release a better picture will be painted on their position for the rest of the year.  I think it's very premature to call the equity a 0 at this point in time.

 

Ok. What levers?

 

The equity is a 0.

[DooDiligence]

I've started looking at the sector lately and have on a list some of the same companies others have. BKE, GES, and RL.  A couple that hasn't been mentioned yet that I'm trying to figure out is JCP and the head scratcher ASNA

 

I don't feel ASNA is a buy yet due to lowered guidance earlier this week.  It looks like their debt is very manageable since the bulk of the debt due to the Ann Taylor purchase a couple of years ago isn't due until 2021 I believe. Cash flows seemed very reasonable to service the debt and payoff the debt coming due until then.  Not sure now how cash flow will look like with the revision.  Would not be surprised if some of the Ann Taylor purchas it written off.  On the bright side they are working on their issues trying to make the move to omni channel for all store. 

 

Also, from asking around some of the customers are very loyal particularly with Lane.  Maybe it's just my age group but most people I talk to go into the stores to try things on and make sure the sizes are right.  Most of them will purchase in the store.  Some will order online from the same store once they are comfortable with the sizing.

 

ASNA equity is a 0.

 

Why?

 

Top-line is deteriorating due to full penetration of portfolio of tired brands, combined Nov / Dec comps declined 4.4% (however they had to increase promotions to drive comps) with pre-Christmas comps (i.e. first three weeks of Dec) down 10-17%

Profitability is now concentrated in one brand (maurices, ~62% of profitability) which has reached penetration and as the brand moves online, will face significant competition from ecommerce players

Justice, historically the Company’s second PNL generator, has collapsed under increased competition and a turnaround is unlikely given pricing pressure and erosion of store-base competitive advantage

All of ASNA’s other brands are fully penetrated and contribute limited profitability

Significant actual and implied leverage creates a very levered entity that drives significant decremental margins on small downward changes in sales (and vice-versa)

Company put on significant leverage for its last acquisition and currently sits on $2B leverage on $580M of EBITDA (i.e. 3x+) which is a lot for a brick-and-mortar retailer, most of the public comps don’t even have debt (with far better top-line trends)

In addition, ASNA has 4 concepts across 750+ stores which creates structural issues in world increasingly shifting to e-commerce

Assumed lease payments of this $750M capitalized at 10x imply leverage of 5.5x+

This is an overleveraged retailer with tired brands in structural decline that could be facing negative cash flow in 2-3 years - just screams structural short.

 

I wanted to like these guys because of the plus sized concepts but I visited them all at an outlet & a nearby mall & was underwhelmed by the competition.

 

I continue to like Carter's Oshkosh because:

 

-10% store comps US & Canada last qtr but +2% ytd

Opening 240 new stores by 2021.

Consistently closing 5 or 6 non performing stores per year.

Co-branded stores doing well.

All stores cash flow pos.

 

Wholesale flat.

 

E-commerce biz up +20% e-commerce comp.

New biz with Amazon (Simple Joys includes value packs developed exclusively for Amazon.)

Canada & China were big drivers online.

Launched on Alibaba T-mall in 2015 & doing well.

 

86% of regular customers shop in store (so says management.)

 

Pou Sheng International Chiang relationship expanding (they manage more than 8000 stores for Nike & Sketchers among others.)

12 stores open in China now with plans to open 40 in 2017.

Wants to have 200+ stores by 2021.

 

http://www.chinadaily.com.cn/business/2017-03/31/content_28749781.htm

 

Expects 4% to 6% overall sales growth thru 2017.

 

I think this looks like a hit in China if Pou Sheng really wants to run with it.

 

People love merchandise with foreign stuff written on it (or maybe that’s just me.)

 

These guys get e-commerce (and, um, Garanimal’s. someone else likes children’s apparel.)

 

and

 

http://fortune.com/2017/04/11/gymboree-bankruptcy/

 

May present opportunities for both Carter's & Children's Place...

[DooDiligence]

Anyone looking at AEO?  Seems to be bringing some stability to core biz, possible growth with Aerie.  The market didn't like their recent earnings, however, and I'm not sure I want to be in mall-based retail.  Any thoughts?

 

Returned around $2.3B to owners through buybacks & divs over the past 10 years which is more than their mkt cap now.

 

Low debt & not bad looking actually.

 

Haven't been into a store.

 

I gotta say that if you walk into a mall to get eyes on retail clothiers, you will leave without wanting to invest a single penny in any of them.

 

But there's a ton of fear attached to the sector (duh.)

 

If you choose to play Fear Factor & can successfully eat one of these nasty looking morsels (with a catalyst attached) you could win immunity going into the next tribal council.

[Jurgis]

My wife still owns a teeny tiny bit of URBN. I kinda like these guys. Hayne seems like a straight shooter with some good ideas (some possibly a bit wacky). Family still owns ~20%. (There is a bit of nepotism possibly).

 

Probably would not invest (a lot) though.

[DooDiligence]

ASOS PLC looks fan-friggin-tastic!

 

unfortunately, it has a multiple to match

[DooDiligence]

RL's Licensing segment: http://www.rocketfinancial.com/Financials.aspx?fID=6024&pw=198750&rID=8&p=2&segID=9520&stID=1

 

90% EBITDA margins, 2% of revenues on capex.  Nothing quite like a brand licensing business!

 

Bump +