Valuentum Exclusive Analysis for the Discerning Investor

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Valuentum is dropping coverage of a few apparel makers to focus resources elsewhere.

Structure of the Retail--Apparel Industry

The retail clothing space is incredibly competitive, very fragmented, and heavily exposed to cyclical pressures and consumer spending patterns. Distribution and storefronts remain crucial, but online threats are becoming ever more apparent. Predicting the correct fashion styles during various seasons of the year continues to be the primary driver impacting the operating results of constituents, and brands can fall out of favor with consumers relatively quickly. Though some firms have developed a dedicated customer following that has helped mitigate abrupt market share shifts, we're generally neutral on the industry.

Ascena Retail (ASNA)

Ascena Retail continues to face meaningful comparable sales declines, and management has cited fashion missteps as hurting recent results.

Ascena Retail is a leading national specialty retailer of apparel for women and tween girls, operating, through its wholly-owned subsidiaries, the dressbarn, maurices, Justice, Lane Bryant and Catherines brands. Justice continues to be its largest and most profitable segment. The company was founded in 1962 and is based in New Jersey.

The retail apparel industry is highly competitive and fragmented, with numerous competitors, including department stores, off-price retailers, specialty stores, discount stores, and internet-based retailers. Long-term success is not guaranteed, and margins are often slim.

Ascena Retail continues to face meaningful comparable sales declines, and management has cited fashion missteps as hurting recent results. Though this is a key risk for any fashion-based retailer, Ascena's stumbles came just ahead of the uber-important holiday period, suggesting management may not have the best handle on its business.

Ascena's restructuring initiative, announced in August 2017, is expected to result in $250-$300 million in cost savings through fiscal 2019. The firm also plans to close up to 667 stores over the next several years as it struggles to adapt to the evolving retail operating environment.

Ascena's long term plan includes growing its family of leading brands to $10 billion in sales with top-tier profitability, but such a target appears to be a pipe dream after considering recent sales trajectories. Making matters worse is its substantial indebtedness, which has ballooned in recent years.

Our published fair value estimate range for Ascena Retail is $1-$5 per share, with a Valuentum Buying Index rating of 3 and an Economic Castle rating of Neutral.

Bebe (BEBE)

Bebe recently announced plans to close all of its physical stores in an attempt to avoid bankruptcy.

Bebe makes a distinctive line of contemporary women’s apparel and accessories. The firm's target customer is a 21 to 34-year-old woman that seeks a hip, sexy, and sophisticated look. The struggling retailer recently underwent a 1-for-10 reverse stock split. It was founded in 1976 and is headquartered in California.

Investors have to be cautious if they plan to own Bebe's shares, which have been extremely volatile of late. It has effectively succumbed to the declines in mall traffic as it recently announced plans to close all of its stores in an attempt to avoid bankruptcy. We're not convinced a brand turnaround is possible.

Bebe's cash flow generation and financial leverage aren't much to speak of. The firm's free cash flow margin has averaged about -11.5% during the past three years, much lower than the mid-single-digit range we'd expect for cash cows. The firm didn't have any debt at the end of last quarter.

The executive suite has suspended its penny per quarter per share dividend. Though we're glad the board no longer feels it prudent to return cash to shareholders, the company's operations in disarray. Bebe will need all the cash it can get for strategic initiatives.

Competition in the specialty clothes business is fierce, and fashion trends are hard to predict. Bebe is not immune to these troubles. We prefer ideas in the Best Ideas portfolio.

Our published fair value estimate range for Bebe is $2-$8 per share, with a Valuentum Buying Index rating of 3 and an Economic Castle rating of Unattractive.

Christopher & Banks (CBK)

The women’s retail apparel business in which Christopher & Banks operates is highly competitive, and differentiation-based advantages are often fleeting and replicable.

Christopher & Banks is a Minneapolis-based company that specializes in women’s apparel. The firm consists of retail, outlet, and online businesses. It offers missy and petite sizes via Christopher & Banks, and plus sizes through CJ Banks. It was founded in 1956.

The women’s retail apparel business is highly competitive. Though visual merchandise presentation, personalized customer service and store locations help to differentiate, these advantages can be replicated. E-commerce continues to wreak havoc on traditional retailers.

The firm's overall strategy for its two brands, Christopher & Banks and CJ Banks, is to offer a compelling, evolving merchandise assortment through its stores and e-commerce web sites in order to satisfy customers’ expectations for style, quality, value, versatility and fit, while providing knowledgeable and personalized customer service.

In the near term, the firm will continue to prudently manage its cash, restricting its capital investments with few new store openings, while strategically investing in its omnichannel initiative, along with select planning and allocation systems, which it believes will drive improved sales productivity.

Investor confidence in Christopher & Banks was shattered after the firm released a disappointing update on fiscal 2016 sales results (comparable store sales fell nearly 8% in the fourth quarter of fiscal 2016) and its CEO announced her departure. Shares have yet to recover from the news.

Our published fair value estimate range for Christopher & Banks is $1-$3 per share, with a Valuentum Buying Index rating of 6 and an Economic Castle rating of Unattractive.

Francesca's Corp (FRAN)

Francesca's recently slashed its fiscal 2017 guidance in a meaningful way, and we've lowered our fair value estimate as this new trajectory may reflect a scenario that is more likely to unfold in coming years.

Francesca’s is one of the fastest-growing specialty retailers in the US. The firm has a diverse and uniquely-balanced mix of high-quality, trend-right apparel, jewelry, accessories and gifts, tailored to the 18-35 year-old, fashion conscious, female customer. It was founded in 1999 and is headquartered in Texas.

Francesca's should continue to benefit from strength in non-apparel categories, though it will have to deliver on the right fashion trends to drive improved performance in its apparel business. The fashion cycle is a key risk to any retailer, as is the increasingly competitive promotional environment across retail.

Francesca recently slashed its fiscal 2017 guidance in a meaningful way, and we've lowered our fair value estimate as this new trajectory may reflect a scenario that is more likely to unfold in coming years. Net sales are expected to be in a range of $481-$491 million, assuming a high-single digit drop in comparable sales. Diluted EPS in the year are projected to be in a range of $0.71-$0.81.

Francesca's Vision 2020 plan to achieve long-term sustainable growth is centered around six strategies: optimize real estate, invigorate merchandising, focus and drive outlets, develop and integrate its digital ecosystem, cultivate and expand branding and marketing, and differentiate and personalize inboutique guest experience.

One of the brightest spots at Fracensca's is the company's direct-to-consumer business. It continues to be a strong performer at the company, and management expects it to continue growing into a higher contributor to overall comparable sales growth.

Our published fair value estimate range for Fracensca's is $7-$15 per share, with a Valuentum Buying Index rating of 4 and an Economic Castle rating of Attractive.

Oxford (OXM)

There's a lot of things going right for Oxford at the moment, but fashion is notoriously difficult to predict.

Oxford is an international apparel design, sourcing and marketing company including a diverse portfolio of owned lifestyle brands featuring Tommy Bahama and Lilly Pulitzer, as well as owned and licensed brands of tailored clothing and golf apparel. It was founded in 1942 and is headquartered in Atlanta, Georgia.

The firm expects to add 5+ new Lilly Pulitzer stores each year, as it drives year-over-year improvements at Lanier. Oxford was working to reduce losses and improve cash flow at Ben Sherman but ultimately opted to sell the brand instead.

Tommy Bahama accounts for a large portion of the firm's revenue. The company expects to add 7-10 new domestic Tommy Bahama stores per year, expand ecommerce, increase women's sportswear and accessories offerings, and focus on Japan and Australia. Oxford thinks it can continue to drive double digit growth in e-commerce at Tommy Bahama.

There's a lot of things going right for Oxford at the moment, but fashion is notoriously difficult to predict. What was hot today could be yesterday's news in no time. The behavior of millennials can perhaps best be described as rebellious. Carefully vetted acquisitions continue to be a part of Oxford's growth strategy.

In fiscal 2017, Oxford expects net sales to be between $1.085-$1.105 billion and adjusted EPS to be in a range of $3.50-$3.70 (up from $3.30 in fiscal 2016). The Tommy Bahama brand has been an area of strength of late, turning in solid comps and positive traffic in the second quarter of fiscal 2017.

Our published fair value estimate range for Oxford is $43-$71 per share, with a Valuentum Buying Index rating of 3 and an Economic Castle rating of Attractive.

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Oxford cut its dividend in 2009, but its strong Dividend Cushion ratio suggests its payout is back on solid ground. 

Oxford Industries has paid a dividend in each quarter since it became a public company in 1960. Strong growth has been present in recent years, and the firm's dividend has returned to respectability following its cut in 2009. Despite the rough past, the company's Dividend Cushion ratio suggests that its current payout is well-positioned with room for growth. This is rooted in the resurrection of earnings growth in Oxford's operations, but the recent weakness in the broader retail space has threatened such growth. For example, Oxford was forced to slash its fiscal 2016 revenue and earnings guidance in the midst of the 2016 holiday shopping season. We're not expecting the operating environment to improve materially in the near term.

Income investors may be troubled by the 50% reduction in Oxford Industries' payout in 2009. This was tied to the headwinds the company's operations faced, as earnings per share fell off drastically as a result of a difficult operating environment. Though earnings have rebounded nicely since the Financial Crisis, and the payout seems to be on solid ground, there are plenty of competing uses for free cash flow, including payment of debt, increased capital spending for organic growth, and spending for acquisitions, such as Southern Tide in 2016. Respectable cash flows should keep Oxford's dividend on safe ground, but the current retail environment is not doing it any favors. 

Our published Dividend Cushion ratio for Oxford is 2.4 with a Dividend Track Record of Risky. 

Tailored Brands (TLRD)

The challenging retail environment continues to put meaningful pressure on comparable sales performance at Tailored Brands.

Men’s Wearhouse changed its name to Tailored Brands in February 2016. The firm is one of North America's largest specialty retailers of men's apparel. Its US retail stores operate under the names of Men's Wearhouse, Men's Wearhouse and Tux, K&G, and Jos. A. Bank, while its Canadian stores operate under the name of Moores Clothing for Men. It is based in Houston, Texas.

Tailored Brands has strong vendor relationships and a lucrative direct sourcing program. The firm's primary rivals include specialty men's clothing stores, traditional department stores, off-price retailers, and outlet stores.

One of the biggest integration challenges Tailored Brands will face with the recently acquired Jos. A. Bank is shaking off its 'deep-discounting' perception. New higher-end products and styles should help improve the company's brand image, and leveraging ideas from its 2013 acquisition of the heftier-price Joseph Abboud brand may be worthwhile.

In fiscal 2017, Tailored Brands is expecting comparable sales to be up mid-single digits at Joseph A. Bank, down low-single digits at Men's Warehouse and Moores, and down mid-single digits at K&G. It projects adjusted diluted EPS to be in a range of $1.65-$1.85 for the year.

The challenging retail environment continues to put meaningful pressure on comparable sales performance at Tailored Brands. Its failed relationship with Macy's hasn't helped, and material reductions in top and bottom line expectations are the result.

Our published fair value estimate range for Tailored Brands is $11-$19 per share, with a Valuentum Buying Index rating of 7 and an Economic Castle rating of Neutral.

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Acquisition-related debt and a brutally competitive retail environment have crushed Tailored Brands' Dividend Cushion ratio.

Tailored Brands has been declaring a $0.18 quarterly dividend for some time now, and we don't think management will be aggressive in growing its payout moving forward. The firm's negative Dividend Cushion ratio is largely due to its outsize debt position, and we think deleveraging would be the best allocation of free cash flow, as opposed to increasing the amount of cash returned to shareholders. In addition to its capital allocation concerns, the company will have to continue battling an overly aggressive promotional environment throughout retail.

The most blatant weakness of Tailored Brands dividend lies on its balance sheet. The large debt position brought on by acquisitions should be management's first priority. Until it is able to effectively delever its balance sheet, its dividend growth potential is not appealing. Free cash flow simply has not been strong enough to counteract the company's debt load while maintaining proper dividend safety, in our opinion. The integration of recently acquired brands is not going as smoothly as the company hoped, and we don't like what we see. Tailored Brands' dividend is in bad shape, and we wouldn't be surprised to see it cut.

Our published Dividend Cushion ratio for Tailored Brands is -5.9 with a Dividend Track Record of Healthy.