Life in the world of women's fashion apparel is often feast or famine. The most recent quarter for Christopher & Banks (NYSE:CBK) is best described as famine with a capital F. Picture sub-Saharan drought conditions and you're on the right track.
You can see the gory details of the numbers in our Fool by Numbers breakdown for the quarter.
What went wrong?
We knew there were problems brewing back in early December, when the company warned comp sales were likely to be down 6%-7% for December. Seems the winter merchandise line was too dressy and unfit for its core customer, who was looking for more casual offerings. This was a major disappointment, as the company had been running solid 4% comp sales during the first three quarters of last year. Management assured investors in December they would take whatever markdowns were necessary to clear inventory, so as to start the spring season back on track.
Is it fixed?
Year-end inventory was $52.4 million, compared to the prior year's $37.9 million, an increase of 38%. On the surface, this looks like a major problem (a bunch of wrong inventory still in the pipeline?), but I would be cautious to jump to that conclusion. Management stated in its earnings release that the higher inventory was due to early receipts of Easter apparel.
To check this, let's do some retail math. Sales for the fourth quarter were up 6%, while cost of goods was up more than 17%. That means that on a cost basis, the company moved through a lot of product; it just didn't make much margin on the sales due to markdowns. This checks out, with fourth-quarter margins down an incredible 670 basis points.
The other check is comp sales in March, which were flat. Not exciting, but greatly improved from the fourth quarter's 7% decline. Customers are back and buying, so I'm willing to give the company the benefit of the doubt that inventory is clean. Actually, we should congratulate management for biting the bullet, whatever the cost, to clear out the bad stuff and get ready for the spring season. Not all retailers have the courage to do this, as evidenced by Dollar General's (NYSE:DG) recent revelation of a misguided inventory pack-away strategy.
Buy, sell, or hold?
The next few days will be interesting. If the stock gets brutalized by this earnings release, it might be worth staking a position (I'm talking, say, down 10%). CBK is a well-run retailer with a strong balance sheet (more than $100 million cash) and a well-targeted merchandising strategy, despite the winter assortment miscue.
We'll get a better read on spring retail sales later this week. Chico's (NYSE:CHS) just reported 5% comps for March. Ann Taylor (NYSE:ANN) releases March sales on Thursday, along with a host of other retailers. My sense is that with Easter one week earlier this year, March retail sales will be pretty solid. If this holds true, then CBK's flat March comps show the famine coming to an end, but no sign yet of a feast. My inclination is to hold for now, until we can see whether CBK is back on track.
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Fool contributor Timothy M. Otte surveys the retail scene from Dallas. He welcomes comments on his articles, but doesn't own shares of any of the companies mentioned in this article. The Fool has a snazzy disclosure policy.
