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Halloween Trick: J. Jill

What's that? Oh-so-benign retailer J. Jill (Nasdaq: JILL  ) , a scary Halloween trick? Well, as Wednesday Addams said regarding her "Halloween costume" in The Addams Family, "I'm a homicidal maniac. They look just like everyone else." (In that scene, Wednesday was wearing the same outfit she wore every day, for those of you who never had the pleasure of seeing that flick.)

OK, it's hard for J. Jill to be homicidal-maniac scary, what with its apparel designed to tempt soccer moms everywhere. However, as an investment, it's a little spooky at the moment. In recent years, J. Jill has given investors many reasons to fear what thrills, chills, and restless spirits might await around the next dark corner. Boo!

Not only have J. Jill's earnings, sales, and same-store sales been flagging for quite some time, the company recently said it's going to report a wider-than-expected quarterly loss despite an uptick in same-store sales. Well, the increase in same-store sales was fueled by markdowns on its merchandise.

Indeed, J. Jill's margins are sagging, with its operating margin and net profit margin currently at five-year lows. Other financial benchmarks look weak as well. For example, during the first six months of this year, J. Jill generated free cash flow of $4.5 million, compared to $21.7 million during the same period last year. That's a bit of a nasty surprise, to the tune of a 79% decrease in free cash flow for the first half of the year.

Several months ago, I wondered if maybe J. Jill shares were approaching bargain range. After all, it had been unloved by investors for quite some time. (Our own Philip Durell, the investing guru behind Motley Fool Inside Value, often looks around for unloved stocks that have been overly punished by investors.) Well, even back then, despite an abundance of negative news, J. Jill was trading at a rather high P/E -- it seems some investors thought they were bottom-feeding, though the stock was already expensive.

Indeed, J. Jill has recently traded at about $14 per share. On the face of it, that might look "cheap" for a well-known retailer, but Fools know better. Just for starters, its shares trade at a trailing P/E of 267, and it's trading at 29 times forward earnings. Given its past history as fashion victim, now's the time for investors to ask where the growth is going to come from, rather than betting on whether this is as scary as things can get.

Last but not least, a recent rumor circulated that hot retailer Urban Outfitters (Nasdaq: URBN  ) was eyeing J. Jill as an acquisition. Some of us wondered why. Urban Outfitters has been doing splendidly on its own in drumming up organic growth; the idea that Urban Outfitters would acquire a struggling retailer like J. Jill, especially when it has its own successful Anthropologie targeting women in the 30- to 45-year-old demographic, seemed to defy logic. (Indeed, that rumor later proved to be just that.)

Investors have been skittish on retailers in general because of concerns that rising gas prices, among other things, could cause consumers to cut back. Indeed, not everyone can be a Chico's FAS (NYSE: CHS  ) , and J. Jill certainly can't masquerade as such for the Halloween costume ball. The way J. Jill's been going, I can't imagine it enjoying the customer loyalty of its more successful rivals, where shoppers keep coming regardless of economic conditions.

I'm not saying that J. Jill won't ever pull off a turnaround -- I just think that it'll be a while until it does happen, if at all. I'd like to see a lot more proof that the customers are coming back to J. Jill, and that they're willing to pay full price while they're at it. Until then, J. Jill seems like a rather scary gamble to make.

Are you looking for value stocks, but want to avoid investments that go bump in the night? Try a free trial toMotley Fool Inside Value.

Alyce Lomax does not own shares of any of the companies mentioned.

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10/21/2016 2:13 PM
CHS $11.93 Up +0.04 +0.29%
Chico's FAS CAPS Rating: **
URBN $33.54 Down -0.10 -0.30%
Urban Outfitters CAPS Rating: ***