As a stock-aholic, I'm regularly making notes to check out the annual reports of retailers that I find doing a brisk business. Claire's Stores
To my surprise, Claire's is a global story with Europe as its main growth engine. The stores are smaller, but the company's products sell well in Europe, and sales and profit per square foot are substantially higher than in the U.S. In contrast, Claire's has a significant presence in the U.S. and, instead of continuing on the expansion parade, the company wisely decided to focus on the profitability of the existing stores back home. The net effect is a small percentage of new stores, but an impressive increase in profitability.
Comparing 2002 with 2004, we can see that Claire's has made a lot of progress over the last two years. Gross margins are up from 48.4% to 53.7%, and net margins have expanded from 2.1% to 10.2%. Revenues have grown 23% over the time period. In addition, free cash flow has exceeded net income for the last three years, which provides some assurance that Claire's isn't pushing the accounting limits.
With profits pouring in, Claire's has paid off all the debt on its balance sheet and has $224 million in cash left over. However, like Gap
Investors will also want to note that Claire's has a dual share structure with the Class A shares -- for which there is no market -- comprising only 5% of the share count, but controlling 36% of the vote. This leaves management firmly in control and the rest of us just along for the ride. In exchange for less of a say in how the company is run, holders of the common shares (that's us) are compensated with a dividend that is 100% higher than the Class A shares.
Is Claire's a bargain? Including operating leases, I arrive at an enterprise value-to-free cash flow (EV/FCF) of 17, which is certainly affordable compared to other retailers and many investments. But, considering that investors are relegated to the back seat of this investment vehicle, I'm inclined to look elsewhere for now.
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