Sometimes it takes me a while to understand another person's rationale for recommending a particular stock.
A case in point is Fool Bill Mann's recommendation of New York & Co. (NYSE:NWY) to subscribers of Motley FoolHidden Gems. When Bill picked the stock, I couldn't convince myself that this represented a good opportunity. The company had been struggling with falling comps, rising inventories, and declining same-store sales.
Well, after Thursday's earnings report and conference call, I now feel much more comfortable with the prospects for this company -- not that things are great, but I don't think the wheels are falling off either.
What makes me feel a lot more comfortable with this company is one of the things it is not doing -- namely, it's not pulling a Christopher & Banks (NYSE:CBK). Earlier this year I complained that Christopher & Banks' management spent most of its time blaming external factors (you know, the "weak" economy, weather, sunspots) for its crummy performance.
In the meantime management went on its merry way -- aggressively opening new stores. It was as if the managers were saying, "If you don't like our clothes, we're, um, going to wait until you change your mind! Bell bottoms came back, after all." As a result the company's stock price has fallen from more than $26 a couple years ago to less than $16 now. Christopher & Banks hired a new chief merchandising officer and may be getting back on track -- finally.
In contrast, New York & Co. isn't blaming the consumers who don't want to shop there. In Thursday's conference call, management said its performance was poor in the second half of the year because the company's fashions were "a little too young" and a bit too expensive for its customers. It was refreshing to hear a management team not use the same old blame-the-consumer excuse.
There are some issues to watch. Bulging inventory is one of them. Management attributes it to a greater in-transit time for inventory that the company picks up in Hong Kong and the need to expand inventory to meet the needs of the newly acquired JasmineSola stores.
If you remove the $11.3 million of in-transit inventory and the $4.5 million associated with JasmineSola, you still end up with inventory growing about 12% over the past year, which is quite a bit higher than the 5% sales increase. Keep an eye on this. Furthermore, gross margins are low at 29.3%, compared with 35.3% last year -- not surprising when you consider that management has admitted its fashions missed the mark.
On the plus side, the management team seems to be prudent with its expansion plans, and it is closing weak stores (two were closed during the third quarter). Same-store sales in October improved, showing a respectable, although unspectacular, 4.7% jump. While there is little chance that this company will morph into the next Coach (NYSE:COH) or Abercrombie & Fitch (NYSE:ANF), I think patient shareholders stand a good chance of eventually being rewarded for holding these shares.
Try these related Foolish articles on for size:
- New York & Co. Posts 3Q Profit on Sales
- New York & Doh!
- A Fashion Faux Pas?
- Christopher & Banks on the Mend?
- Can You Bank on Christopher & Banks?
Check out our Foolish Community boards for lively discussion of these retailers:
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Dan Bloom doesn't own shares of any stock mentioned in this article. He welcomes your feedback .
