I used to live just up the road from Yankee Candle's (NYSE:YCC) headquarters in the Pioneer Valley region of Massachusetts. Though I'm familiar with the company from a consumer's perspective, I'm less aware of its merits for investors. But since the company released first-quarter results on Wednesday, now is as good a time as any to start looking. If the shares become cheap -- currently, they're not -- it'll be good to already understand the business and snatch up a quick bargain.
Yankee Candle's first quarter was good, but not great. Total sales were up 12%; excluding a tax benefit, diluted earnings per share were up 9%. Retail sales rose 19%, and total retail comparable sales (including both retail shops and direct-to-consumer sales) were up 8%. However, the number of transactions in the retail stores was down -- a trend to watch.
On the wholesale side of the business, total sales were up 7%, but wholesale comparable sales fell 2%. The company also had one of its wholesale customers reduce its inventory levels, though sales remained high. Yankee Candle expects this trend to continue within the wholesale segment.
On the inventory and working capital front, the company is trending in the opposite direction. While its revenue was up 12%, its inventory balance was up 32% year over year, and up 14% sequentially since the end of the fourth quarter. On its conference call, Yankee Candle attributed some of this gain to inventory build for the new products it's launching, which is acceptable if inventory growth for the rest of the year slows down. Accounts receivable were up 26%, but after adjusting for large one-time items, they were up in line with sales. Accounts payable were down about 30%, both sequentially and year over year. For those looking at traditional operating cash flow and free cash flow, the negative net effect of these working capital changes will show up in Yankee Candle's statement of cash flows in its 10-Q filing.
On the rest of the balance sheet, little has changed. During the first quarter, the company took on an additional $30 million in debt to fund working-capital needs, but given the company's historical free cash flow, it seems it can support this debt without much trouble. The rest of the company's debt is more interesting, because it's primarily related to share repurchases the company executed last year.
Overall, I think Yankee Capital is a pretty good company. In the near term, it's certainly healthier than its competitor Blyth (NYSE:BTH). But the valuation isn't intriguing enough for me to consider a company focused on candles over a more diversified retailer such as Wal-Mart (NYSE:WMT) or TJX Companies (NYSE:TJX), which currently trade at attractive valuations.
For more Foolish candlepower:
Nathan Parmelee wouldn't mind heading back to western Massachusetts to hang out for a few weeks. He has no financial interest in any of the companies mentioned. The Motley Fool has an ironclad disclosure policy.
