Big Upside for this Small Cap Retailer

Perry Ellis (NASDAQ: PERY  ) is a small cap flying under the radar of Wall Street and the financial press. The apparel designer, marketer, retailer, licenser, and manufacturer of more than 30 apparel brands is a CAPS five-star-rated stock trading at a trailing earnings multiple of 17.1, which is much lower than the industry average of 25.1. This company is long overdue for a Strengths, Weaknesses, Opportunities, and Threats (SWOT)  analysis..

Strengths

  • The company owns and licenses a portfolio of famous brands: Jantzen, Callaway, Rafaella, Nike Swim, and more, including the namesake Perry Ellis brand. Some 80% of revenue comes from the following segments: Perry Ellis, 30% of revenue; ladies, 15% of revenue; men's sportswear, 15% of revenue; and PEI golf, 20% of revenue.
  • The company has a diverse distribution channel with indirect channels of 58,000 retailers, 30 indirect websites and 58 licensed stores. Direct channels include 64 company-owned domestic and five international retail stores, as well as six company websites.
  • The company has compound annual growth rates of 8% for revenue and 12% for earnings per share since FY 2010.
  • Both the PEI golf segment and e-commerce increased sales by 30% in FY 2013. Its websites are immerse and explore each brand's unique lifestyle. The company creates branded landing pages in connection with retail partners Macy's and Amazon.com.
  • The company is a savvy marketer. Its launch of Very Perry, a refresh of the Perry Ellis brand, received more than 350 million impressions with public relations and editorial coverage. To promote its Original Penguin, the company ran 80 events nationwide and also signed John Hu, the 2012 PGA tour rookie of the year, as a brand ambassador.
  • After three-plus years of rising comparable same-store sales at its retail locations, the company plans to extend the streak with cross-channel loyalty programs, and has installed mobile point-of-sale programs.

Weaknesses

  • It is in a highly competitive industry with only its urbane, sophisticated style to differentiate itself in a soft retail environment.
  • 2013 was a year of transformation (translation: earnings were down year-over-year as the company invested in the business). The company implemented future-forward changes like radio frequency identification bar codes in its brands and retail channels, opened stores, and debuted new product lines.
  • For the first half of this year, earnings were essentially flat, but the company offset slower retail sales by bringing down SG&A expenses. Perry Ellis licensing revenue grew 14%.The company guided for single-digit growth going forward.

Opportunities

  • Namesake brand Perry Ellis is the No. 1 dress pant in the US and holds the leading spot in belts and wallets in department stores. This fall it is debuting the first Perry Ellis denim line.
  • The company has strong Latin ties, as its founder was a Cuban emigre who imported Guayabera shirts into the US.Its retail partners are actively courting this demographic, with a 50-million plus US population and $1.3 trillion in potential buying power.The company has three Latin menswear brands: Cubavera, Havanera, and Chispa. The company engaged Univision Sabado Gigante's Carol Rosa as its Rafaella women's brand ambassador.
  • The company only has three women's brands total, so there is room to grow in this category.
  • Overseas expansion is a goal the company is diligently working toward. Its Laundry by Shelli Segal brand opened a store in Beijing in May. The company is bringing its Nike Swim and Jantzen brands to Mexico next year.
  • The company has grown throughout the years via strategic acquisitions, most recently in 2008 by buying two women's brands, as well as through licensing agreements, the latest in 2009 with Callaway. It may be time for another deal.

Threats

  • There is no lack of competitors. Perry Ellis' 30-plus brands in men's, women's, golf, and swim categories garner several competitors each. The Perry Ellis brand is up against Phillips-Van Heusen (NYSE: PVH  ) with its Calvin Klein and Tommy Hilfiger lifestyle brands, which generate three-quarters of PVH's revenue, or $13.6 billion in 2012. PVH legacy brands Izod, Arrow, Van Heusen, and Speedo also compete against Perry Ellis brands.  
  • Perry Ellis is up against Michael Kors, as well as the Kate and Jack Spade brand of Fifth & Pacific, just to name a few. Big-cap retailer Gap (NYSE: GPS  ) competes against Perry Ellis in all its segments. Gap is trading at only a 13.6 trailing earnings multiple and offers a 2% yield. The stock took a big hit after reporting that September same-store sales declined 3% compared to a 6% increase year-over-year.  
  • Sourcing from 130 independent suppliers in 30 foreign countries comes with geopolitical risk and supply fluctuations.

Final takeaway
The main caveat with Perry Ellis is its competition. It is cheaper than PVH  with its 43.7 trailing earnings multiple and only a 0.1% yield.

PVH's net profit margin is approximately 3% to Perry Ellis' 1.7%. But Perry Ellis has more cash per share, $3.89, near 20% of the share price, to PVH at $7.71 cash per share trading at $118. Gap (trading at $36.83) has $4.12 cash per share.

Perry Ellis deftly makes its way through a soft retail atmosphere and against formidable competitors. It has a fair valuation for a small retailer with this much growth potential. Perry Ellis looks very good going forward.

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  • Report this Comment On November 13, 2013, at 11:18 AM, kanooyou wrote:

    AnnaLisa,

    This was certainly a good call to buy at around 18.50. It rose to 19.50 after 3 weeks or so. Unfortunately, we may have missed any advisory from you to bail out before Nov 13th when it lost 22% overnight, dropping to 15.10 or so. Arrggghh!. Hope you didn't invest a lot of your own money in this enterprise.........

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