As I glanced at the fourth-quarter results for Deb Shops (NASDAQ:DEBS) this morning, I asked my nearby fellow Fools, "Is there a good reason why none of us have owned shares in this company during the last couple of years?"
None of us immediately had a good answer.
But after a few minutes of reflection, I think there's a decent explanation. Despite the multiple opportunities Deb Shops has provided for investors to pick up shares and net 25-30% gains, the slight increase in its dividend, and the $6 one-time special dividend it recently paid, it's just not possible for investors to pick up shares in every good story. And chasing a company once all its good news is public knowledge generally leads to poor returns.
Deb Shops' quarter was solid, but I think it's more meaningful to focus on the annual results and the company's outlook for next year. For the year, the company's sales increased 7%, while diluted earnings per share rose 37%. The balance sheet data provided by the company further suggests solid growth quality. I'll want to see the 10-K and the statement of cash flows to make sure, but I'm not seeing any glaring warning signs here.
As mentioned above, Deb Shops did pay out a special dividend of $6 per share, which depleted the company's balance of cash and short-term investments from $189 million to $106 million during the third quarter. However, the $117.5 million in cash and short-term investments currently on the balance sheet suggest that the company is already rebuilding its cash hoard. It also looks like Deb Shops enjoyed robust free cash flow; I can't say for certain, since the company didn't provide a statement of cash flows in its earnings release.
Deb Shops is well-run and reasonably priced, but I believe that other, similarly valued retailers offer a slightly more compelling long-term opportunity. Like Deb Shops, American Eagle Outfitters (NASDAQ:AEOS), Abercrombie & Fitch (NYSE:ANF), and Buckle (NYSE:BKE) all have strong balance sheets and healthy free cash flow. However, if Deb Shops' shares experience a temporary pullback, they could become an attractive value opportunity.
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Nathan Parmelee owns shares in American Eagle Outfitters but has no financial stake in any of the other companies mentioned. The Motley Fool has an ironclad disclosure policy.
