Teenybop clothier Deb Shops (NASDAQ:DEBS) wowed the critics yet again yesterday. While its announcement that year-on-year revenues increased a measly $500,000 didn't exactly garner rave reviews, its ability to turn a $500,000 increase in sales into a $700,000 increase in earnings turned quite a few heads indeed. Never fear, though, Fools. We're not looking at a case of Tyco- (NYSE:TYC) brand accounting here. As we discussed three months ago, Deb is just doing the same thing that retailers such as BJ's (NYSE:BJ) and Men's Wearhouse (NYSE:MW) have shown to work so well in this low-margin business -- boosting margins to create outsized leaps in profitability.
If we step back to take a look at the company's big-picture performance year to date, we can see that in comparison to last year, Deb has nearly doubled its operating margin from 2.5% to 4.6%. Result: While revenues year-to-date have barely budged, up just 1.5% over last year's numbers, earnings per diluted share have leapt 77% in response. If Deb is somehow able to keep this streak going into the historically strong-for-retailers Q4, it could conceivably earn as much as $1.65 this year, destroying consensus analyst estimates that it will earn just $1.32. While bearing in mind that this $1.65 figure is just a best-case hypothetical, if it plays out, this stock would be trading for just 15 times earnings -- about a 20% discount to the going P/E rate for the retail clothing industry.
On the other hand, the company itself is projecting diluted EPS closer to $1.25 for the year -- a figure that would undershoot Wall Street's expectations and one that explains the Street's muted enthusiasm for the stock (which rose less than 1% post-announcement). What could explain Deb's lack of self-confidence? Well, the fact that its sales growth has been so stubbornly anemic suggests the brand is unpopular. And the company's year-on-year decline in inventory turns (how many times a company can sell down and restock its entire inventory within a given period), from last year's 7.2 to this year's 6.9 times in the first three quarters, dealt another blow to its self-esteem.
Ah, but if either one of those issues gets resolved between now and Dec. 25? By pairing better margins with faster sales growth, Deb could well become the talk of the town.
For more Foolish views on this cash-rich waif of the retail clothing world, read:
- Is Deb Well-Dressed?
- Bargain Hunting at Deb Shops
- Irrationality Sells at Deb Shops
- When Management Hoards Cash
- Deb Drops
Fool contributor Rich Smith owns no shares in any of the companies mentioned in this article.
