Midwestern women's retailer Christopher & Banks (CBK) has a new CEO, a new product strategy, and plans for new stores, all of which have stoked investors' enthusiasm and resulted in a strong stock price gain versus the retail industry average over the past year. After poor inventory management led to sub-30% gross margins in 2010 and 2011, management finally took drastic measures. The company closed unprofitable stores and returned its product mix to the simple styles and value price points that resonated with its core customer base. The result has been higher customer traffic and better comparable store sales that led to more productive stores. However, with tough competition in the sector, is Christopher & Banks currently a good bet?
What's the value?
Christopher & Banks is a value-priced retailer of casual and wear-to-work apparel and accessories for women. The company targets the 45-to-60 age demographic with a core selection of knit tops, sweaters, and pants. As management has acknowledged, the company tried to get too fashionable and varied with its clothing styles at prices not conducive to its customer base, leading to sharp markdowns and a gross margin that hit an annual low of 24.4% in 2011. Fortunately, management saw the writing on the wall and subsequently launched an improvement plan that included shrinking both its retail store footprint and its number of distinct clothing styles, as well as dropping the average prices of its products.
In FY2013, the fruits of management's labor have started to find lasting traction, with comparable store sales up 7.7% and a return to operating profitability. Counter-intuitively, Christopher and Banks' product price reductions have led to greater customer traffic and lower overall inventory markdowns, which ultimately produced a higher gross margin. More importantly, rationalizing product lines has created cost savings in the supply chain, resulting in positive operating cash flow and the ability to pursue growth, and the company plans for roughly twenty store openings per year.
Chasing the competition
Of course, Christopher & Banks has some work to do to catch its more profitable, growth-minded competitors, like Chico's FAS (CHS). The company has a namesake chain that is of comparable size to Christopher & Banks, with roughly 616 stores, and it targets a similar customer base of middle class working women. Chico's FAS is also trying to keep the upwardly mobile members of its customer base within the corporate fold through its newer, premium priced retail concepts, including White House/Black Market and Boston Proper.
After strong double-digit increases in sales and operating income in 2012, Chico's hasn't fared as well in fiscal year 2013. The company's profitability has been hurt by lower comparable store sales and a more promotional pricing environment that has negatively affected its gross margin. Despite this, Chico's continues to generate solid operating cash flow that is allowing it to build out its retail footprint, with plans for roughly 120 new stores in 2013.
Also on the competitive threat list is TJX Companies (TJX 0.76%), the largest off-price retailer of apparel and home fashions through its TJ Maxx and Marshall chains. The company has been a strong beneficiary of customers' desire to pay lower price points for name brand apparel, offering products at 20% to 60% below traditional retailers' prices. TJX's strategy of using low prices to bring customers into its sparsely decorated stores has been a winning formula, as its operating margin hit a five-year high in 2012.
Unlike Chico's, TJX has continued to grow in FY2013, aided by a 3% gain in comparable store sales and a further expansion of its overall store base. In addition, the company's operating margin has remained near last year's high level, despite the costs of pursuing growth through an enhanced online presence. TJX's strong profitability allows it to operate debt free on a net basis, and provides the financial firepower to opportunistically purchase large volumes of inventory on terms that its smaller competitors can't match.
The bottom line
Christopher & Banks is a nice turnaround story, with recent increases in per store sales production that seem to be a function of its more focused merchandising strategy. However, it still has a tough road ahead to get its operating margin to meet management's goal of a high single-digit level, which would put it closer to those of Chico's and TJX. Until the proof shows up in Christopher & Banks' results, investors might want to keep this retailer on the bench in favor of its larger, more efficient competitors.
