Lessons from nodders' row
In a previous life, I dated a shopper. Not one of those the-closet-has-60-pairs-of-shoes shoppers, but someone who clearly enjoyed scouring the sale racks and trying out new togs. While other people spent their New York Saturdays listening to poetry, chasing softballs across Central Park, or checking out the nifty old bones at the Natural History Museum, I spent what seemed like 99% of mine on nodders' row.
You know the spot. My usual place was at Ann Taylor (NYSE: ANN ) , but every women's clothing store -- such as Chico's FAS (NYSE: CHS ) and J. Jill Group (Nasdaq: JILL ) -- has one (or should). It's that oasis near the dressing rooms where fluffy chairs offer us weary bag carriers a chance to rest our feet and minds, a brief daydream, with an island-themed soundtrack. (Why is it always island music?) We drop the bags, close our eyes, listen to the steel drums, and prepare for our performances while our shoppers undertake costume changes.
Showtime comes once every few minutes, when we nod like a bobblehead and say, "Yeah, that looks great." Unless, of course, she's wearing something that we suspect may make our shoppers feel overly large in the wrong places. Free advice: If she turns to look at her backside then frowns and bites her lower lip, it's best to keep your trap shut, brother, or at least ask her what she thinks first.
It's a tricky business being the shopper's little toady. Far trickier, I would argue, than delving into the finances behind some of these companies. Fortunately, the Fool is investors writing for investors. So, before you look at the rapidly dwindling balance at the bottom of your check register and decide that any of these companies must make a great investment, let's take a peek at Jill, Chico's, and Ann to see whether they're as beautiful inside as out.
Every one of these women's clothing retailers has outperformed the broader market over the past year. While Jill and Ann have gained around 20%, Chico's returned twice that. Fundamentally, all have much more cash than long-term debt. All of them have ramped up sales over the past year, and (hurray!) all of them have decent free cash flow. On the surface, two of our trio look similarly valued. Chico's carries a P/E of 33, Jill's sporting a sky-high 39, while poor little Ann checks in at 15.
The three stores cater to the same demographic, women ages 25 to 55 in search of casual but snappy clothes, the kind who turn their noses up at the offerings of biggies such as Sears (NYSE: S ) , Federated Department Stores (NYSE: FD ) , or May Department Stores (NYSE: MAY ) . Rumors of this market's death, it turns out, were somewhat exaggerated. A general retail rebound over the past year has -- bumpy months notwithstanding -- buoyed the revenues, earnings, and share prices of all three. But are they all as pretty as they seem?
J. Jill's bumpy ride from catalog outfit to Internet, retail, and catalog outfit is familiar to longtime Fools. The most recent rough spot came last fall, when J. Jill weathered yet another quarter of flat revenues and heavy operating expenses and decided -- again -- to restructure.
Since then, the company seems to have righted the ship. Over the last few months, revenue increases have been measured at 20% and above, with great-looking growth in same-store sales.
|J. Jill Group||June 2004||March 2004||Dec 2003||Sept 2003|
|% diff YOY||24%||21%||6.5%||2.9%|
|% diff YOY||7%||175%||-47%||NA
As I pointed out in a quick assessment earlier this week, J. Jill looks expensive at a P/E of around 40, especially given management's refusal to provide any forward guidance for the rest of this year. Return on equity is a paltry 5.5%, and net margins of 5% are nothing to write home about, but they're better than last year's 2%.
However, digging a bit deeper, we see a company with one metric many Fools admire: free cash flow. Since the firm has already put up nearly $20 million in free cash flow this year and plans to open only half as many stores as the prior year, the unencumbered greenery looks like it may come in around $35 million, giving the firm a rock-bottom enterprise value-to-free cash flow (EV/FCF) ratio of less than 10. There are very few companies out there trading at that kind of multiple, let alone retailers with growth plans. This, and a strong balance sheet, all make Jill worth a second look. If the company can clean up its spending and keep even a modicum of revenue and earnings growth, shareholders could see some real rewards.
Chico is da man
Why would you even look elsewhere? A Foolish pick for Stocks 2004, and a favorite of the growth-loving Fab 15 board, Chico's FAS has posted eye-popping growth for years now. The stock price has confounded naysayers, or those just waiting for it to cheapen significantly, but that's what happens when a firm makes a habit of doing things such as putting up 50% higher sales for July, on 14% comps growth.
Here's what Chico's has done over the past year:
|Chico's FAS||May 2004||Jan 2004||Nov 2003||Aug 2003|
|% diff YOY||52%||56%||53%||39%|
|% diff YOY||60%||71%||67%||47%|
With that kind of revenue and earnings growth, it's no wonder the stock price has seen little respite. And check out the curvaceous margins, roughly double those turned in by J. Jill. Net margins routinely reach 14%, while the return on equity is a stunning 25%.
Wondering whether the company is mortgaging the future to attain that blistering growth? Not a chance. Chico's more than doubled free cash flow between fiscal years 2003 and 2004, when it recorded $93 million. Sound good? Then how about this: For the first quarter of this year, Chico's has already turned in $47 million. That explains why this fast grower remains debt-free and sits on $180 million in cash and short-term investments.
The firm plans to open about 90 new stores this year. That more rapid growth rate looks like it should cost about $45 million. Assuming only the analysts' 35% growth rate for all of this year, and the historical average of cash provided by operations, Chico's could put up in the neighborhood of $153 million in free cash flow for the year. Assuming 50% growth of net income, that number could be $175 million. That would leave the firm with an EV/FCF ratio around 20. That's not a rock-bottom rate, but on the other hand, it's still cheaper than the market as a whole, and it's outstanding for a company growing as quickly as Chico's.
Is Ann an also-ran?
Poor Ann Taylor. Yesterday, the firm increased its full-year guidance, but it admitted a slip in July's same-store sales. The market responded with a 10% bruising. Was it deserved?
For the past year, the results at Ann Taylor were:
|Ann Taylor||May 2004||Jan 2004||Nov 2003||Aug 2003|
|% diff YOY||23%||27%||17%||14%|
|% diff YOY||67%||86%||19%||15%|
Of course, the story at Ann Taylor is the continued success of its more casual and inexpensive Loft segment. Last quarter, Loft's revenues grew at a 50% clip, double the rate of the entire firm, while its same-store sales increased an incredible 25%.
For the past two years, Ann Taylor has turned in hefty cash flow from operations, somewhere around 1.8 to 2 times earnings. That's led to free cash flow of more than $110 million both years. Assuming management and analyst projections for 27% growth in net profits come true, and counting on a cash flow return similar to the past two years plus (or minus, actually) $75 million for capital expenditures, Ann Taylor many come in with $150 million in free cash flow for 2004, putting it at an EV/FCF ratio near 9. Again, that would be a significant bargain to the market as a whole.
The golden apple
In that old Greek yarn, Paris awarded the golden apple to Aphrodite, whom he deemed the fairest of the three Olympian lookers. If pressed into service (I make a skinny, balding Paris), I'd have to fork my hard-earned golden apples over to Chico's. Its stellar margins, phenomenal growth, and huge return on equity make it the fairest of this bunch, despite its relatively higher valuation. Luckily, we investors don't have to bind ourselves to only one of these beauties. As long as J. Jill and Ann Taylor keep churning up ample cash, they are also worth the double take.
For more Fool investing know-how:
- What's the deal with free cash flow?
- What do I know from return on equity?
- Give me my own shovel, please.
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