There aren't many of us who can claim to have the problem of too much cash lying around. For me, finding a few exciting ways to spend some spare bucks would be a piece of cake. But when you're a public company, there are those pesky shareholders to consider. With good reason, they expect management to put extra cash to its best ultimate use. That's the quandary Claire's Stores
First, let's look at the first-quarter results released on Thursday. As expected, they look pretty good. Revenues increased 7.5%. Earnings per share were also up 7% to $0.30. That beat analyst expectations by $0.03 per share, and is a very respectable performance going up against an exceptional first quarter last year when revenues grew 17% and profits leaped forward 78%.
Digging a little deeper into the P&L uncovers no material problems. Gross margins were down slightly on promotions to clear inventory after a softer than expected holiday season, but that was largely offset by a little SG&A leverage. Inventories ended the quarter in good shape, growing at about the same rate as sales.
The company is the leader in its niche -- value-priced fashion accessories for pre-teens through young adults. It competes in the U.S. directly with Too
What's the problem? The company has been too successful. It has grown to 3,013 stores worldwide, and there aren't many enticing new markets to enter. Store count is growing at about 2% per year, and normal same-store sales growth is expected to be in the range of 2%-4%. Barring an explosion of worldwide demand for juvenile jewelry, you have a company that is likely to grow in the upper-single-digit range.
Cash flow has been exceptional over the past three years, averaging $130 million per year. Available cash now stands at $316 million, over $3 per share, and continues to climb. The company has no debt. What I wouldn't give to be in the same position.
So what's a well managed, slow-growing cash cow to do? Start buying back shares, increase the dividend, take a walk on the wild side and make a big acquisition? Claire's has brought in some pin-striped consultants to help figure it out. Their strategic review started a few months back and is expected to wrap up around the end of the second quarter.
Is Claire's worthy of a buy at today's price of around $23? I think the stock is a little undervalued. Projecting cash flows into perpetuity with a 5% growth rate and discounting at 9% yields about a $35 per share value. Give that a 25% haircut for some uncertainty as to how sustained the teen jewelry market is, and you're left with around $26. So the stock looks to have some upside potential, but I would wait another quarter to see what the suits decide.
Stay up-to-date on teen fashion happenings here:
- Nathan thinks Claire's shares glow in the dark.
- Last year the company looked snappy.
- Hunting for bargains can be fun and profitable.
Fool contributor Timothy M.Otte has a teenage daughter who thinks Claire's is the cats meow. He welcomes comments on his articles, but doesn't own the stock of any company mentioned in this article.
