Retailer Dress Barn (NASDAQ:DBRN) is currently enjoying red-hot performance. The company just reported its ninth straight quarter of increased same-store sales, and its stock has nearly tripled over the past year. It's up 35% year to date, accounting for a 2-for-1 stock split in early April. Should investors expect more of the same?
Right now, the market clearly thinks so. Dress Barn's stock was up 12% after yesterday's earnings report. For the quarter, the company reported an impressive 7% increase in same-store sales, an 11% net sales increase, and even more impressively, 71% earnings growth. Inventory growth was flat, providing further evidence that the company's merchandise is moving quickly. In addition, Dress Barn seems to have paid down nearly 40% of the long-term debt it took on to purchase the maurices chain in January 2005.
Even more favorably, management raised earnings guidance for the year to $1.10 per share, from $1.05-$1.07 per share. For next year, it forecasts earnings of $1.25-$1.30 per share, for 14%-18% growth from 2006 earnings. Based off the current price of $26.20, this year's projected P/E is about 24, while next year's is 20-21.
Historically, sales growth has averaged about 9% annually over the past five years, with annual earnings growth of just less than 13% over the same period. The company has also averaged a roughly 10% return on capital, which has recently increased to near 15%. In a nutshell, growth has been impressive; the company has grown to about 800 dress barn stores and 530 maurices stores. (The company spells both chains' names in lower-case letters.)
Management estimates that it will open 100 more stores this year, indicating that the company sees plenty of future expansion opportunities. Though Dress Barn stated in its most recent 10-K filing that managing growth is challenging, it did not specify the point at which it felt the U.S. would be saturated with its two store concepts.
Dress Barn is unquestionably well-run, but the easy money in this stock may already have been made. Robust growth may continue, but Dress Barn's current valuation leaves little room for error, and there seems to be little opportunity for further multiple expansion.
My concern with clothing retail stocks stems from consumers' fickle tastes; it's only a matter of time before management flubs a seasonal fashion trend or has a period of misses. For the savvy Foolish investor, a miss or two might not be a bad thing. The resulting pullback in the stock price could create a better margin of safety for Fools seeking a long-term investment.
Among Dress Barn's rivals, Gap (NYSE:GPS) has been taken down several pegs, but it may also be a value trap. Pacific Sunwear (NASDAQ:PSUN) is also going through some growing pains, while shares of Urban Outfitters (NYSE:URBN) are finally cooling off after a stellar four-year run of comp increases.
At some point, Dress Barn's clothing will fall off the fashion bandwagon, if only for a short spell. Unless you are a momentum investor, I would recommend being more selective before investing in the crowded retail space.
Gap is an Inside Value selection and a Stock Advisor pick, while Pacific Sunwear is a Stock Advisor recommendation. Click the preceding links to try both Foolish newsletter services free for 30 days!
Fool contributor Ryan Fuhrmann holds no financial interest in any company mentioned. Feel free to email him with feedback or to discuss the company further.
