Claire's Buried Treasures

Like people, companies have life cycles. While the occasional company is able to fight off age to post continuing robust sales growth, most eventually find that their future growth is less about the top line, and more about efficiency and leverage. I believe that's the case with Claire's Stores (NYSE: CLE  ) ; it's a fine company in the costume jewelry and accessory business, but it's been around the block a few times already.

Revenue in this second quarter was up 7%, as overall storewide comps increased 2%. That number contained some interesting moving parts, however. The signature North American business saw comps increase 5% (though on lower transaction volume); the Icing line saw 2% comps growth, and overseas sales were down 2% on a comparable basis. Cost control looked pretty good this time around, and though inventories grew faster than sales, the company's inventory turnover and cash conversion cycle looked relatively better.

Few youth/teen retailers control their sector quite like Claire's. Sure, you can get costume jewelry at Wal-Mart (NYSE: WMT  ) , Target (NYSE: TGT  ) , and other retailers, and I assume you can get it online, too. But competition is generally less about having a monopoly on the distribution side, and more about having a monopoly on shoppers' minds. While Claire's still has the burden of guessing right on fashion and merchandising itself appropriately, I still see the company as more of a leader in the space than a follower.

It's also worth noting that Claire's has a clean balance sheet and a return on capital far greater than that capital's cost. Over the long haul, investors ultimately reward such growth in a company's true economic profits. As always, the key is to buy the stock when it's pessimistically priced. After all, a healthy spread on the cost of capital is a great place to start, but even with these outperformers, price still matters.

For more Foolish thoughts on retail:

Wal-Mart is one of a few retailers recommended by ourMotley Fool Inside Valuenewsletter. You can discover the others with a free 30-day trial.

Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).


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