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Revisiting the Apparel Sector

At the end of last year I discussed my opinions on the stock of certain companies within the apparel sector. These companies were:

According to my last discussion on these stocks:

I don’t see any near-term changes for improving profits, so there’s still a good chance prices could fall even further… hence being placed on my watch list. Let’s see what happens over the next six months.

It’s been six months now and I though I’d revisit these stocks.

When looking at their 6-month charts retrospectively, each of theses stocks would have produced good short-term returns on investment if traded between their January lows and March highs. Although nothing fundamentally changed for the better, they each rallied as the market rallied. However, now that the bear market rally faded, so did each of these stocks. We’re now back where we were at the end of last year, and trending down.

So, how has each individual company dealt with this challenging economic environment over the past six months?

1. According to their last 10Q, Stein Mart hasn’t fared too well. The company did return to the black for the first quarter and reported a $0.17/share profit. However, the profit was primarily due to an aggressive cost-cutting campaign and a share repurchase program, which won’t be duplicate in the next quarter. Net income was down 14% from the same period last year.

The company has also discontinued it’s share repurchase program, suspended the payment of quarterly dividends, and is no longer debt-free. According to the 10Q:

The Company had $40.0 million in borrowings and $10.0 million of outstanding standby letters of credit at May 3, 2008.

After being basically debt-free thoughout 2007, the company borrowed money to pay for opening new stores and renovating existing ones. However, Stein Mart has borrowed money in previous years to finance expansion and paid it back quickly. On a positive note, they are focusing their efforts on marketing and advertisement, and have decided to stop expanding until things turn around.

2. Christopher & Banks took a whupping on Friday and reached record lows after announcing that it expects 2nd quarter earnings to fall between $0.00 – $0.03 per share. According to that press release:

On June 26, 2008, Christopher & Banks Corporation (the “Company”) issued a press release disclosing material nonpublic information regarding the Company’s operating results for its first fiscal quarter ended May 31, 2008. In the press release, the Company also announced that it anticipates its fiscal 2009 second quarter earnings per diluted share will range from $0.00 to $0.03. The Company’s earnings guidance reflects the expectation of a high-single-digit decline in second quarter same-store sales as compared to last year’s second quarter.

However, at the same time the company also reported pretty good 1st quarter results of $0.32 per share, consistent with results from the same quarter last year.

A look at their most recent 10K reveals some of the same actions Stein Mart has undertaken; marketing and advertisement changes, cost-cuttings strategies and limiting expansion plans. However, Christopher & Banks is in a much better financial position. They are still operating without any long-term debt and have a more-than-fair amount of cash on hand to finance ongoing activities.

3. Chico’s FAS has not fared any better. According to their latest 10Q:

For the thirteen weeks ended May 3, 2008 (the “current period”), the Company reported net sales, operating income and net income of $409.6 million, $16.7 million and $12.7 million, respectively. Net sales decreased by 9.6% from the comparable period in the prior fiscal year, while operating income and net income decreased by 77.6% and 73.0%, respectively, from the comparable thirteen-week period ended May 5, 2007 (the “prior period”). The Company’s gross margin percentage decreased to 55.9% for the current period compared 61.7% in the prior period while selling, general and administrative expenses (“SG&A”) for the fiscal 2008 first quarter increased 3.4% to $212.1 million from $205.1 million in the prior year’s first quarter.

After reading this 10Q I get the uneasy feeling that management may be living in denial concerning their circumstances. Although every aspect of their business has been hit hard this year, it seems as though management isn’t too concerned about their losses. Chico’s FAS also does not report any cost-cutting strategies or new marketing and advertisement campaigns in its 10Q. They also plan to continue their expansion at it’s present rate, are not seeking sources for financing “just in case” things get worse, and believes cash flow from operations should provide enough money to finance ongoing activities and expansion. According to the same 10Q:

Based on past performance and current expectations, the Company believes that its cash and cash equivalents, marketable securities and cash generated from operations will satisfy the Company’s working capital needs, capital expenditure needs (see “New Store Openings and Headquarter Expansion” discussed below), commitments, and other liquidity requirements associated with the Company’s operations through at least the next 12 months.

But, I see things differently. Compared to the same period last year, net cash provided by operating activities decreased from $88.4 million to $36.4 million, net cash provided by investing activities decreased from$103.7 million to $13.3 million, and net cash provided by financing activities decreased from $1.4 million to $0.2 million. This sounds like a significant decrease in cash flow to me.

The company does report a 59% increase in its cash position compared with the same time period last year, but this increase is due to a one-time sale of marketable securities, and not cash provided by operating activities. The good news is that Chico’s FAS still doesn’t carry any long-term debt.

4. Of these four apparel companies, Cato Corporation seems to have weathered this economic downturn best. Sales have actually improved from this time last year, while earnings per share for this quarter remained flat ($0.58 vs $0.59). Flat is pretty good considering many other apparel retailers reporting significant losses.

Cato Corporation still remains debt-free and, like Chico’s FAS, has significantly improved its cash position (doubled) from last year at this time, secondary to investing activities. According to their latest 10Q:

The Company has consistently maintained a strong liquidity position. Cash provided by operating activities during the first three months of fiscal 2008 was $23.3 million as compared to $38.6 million in the first three months of fiscal 2007. These amounts enable the Company to fund its regular operating needs, capital expenditure program, cash dividend payments and share repurchases. In addition, the Company maintains $35 million of unsecured revolving credit facilities for short-term financing of seasonal cash needs. There were no outstanding borrowings on these facilities at May 3, 2008. The Company believes that its cash, cash equivalents and short-term investments, together with cash flows from operations and borrowings available under its revolving credit agreement, will be adequate to fund the Company’s planned capital expenditures, dividends, share repurchases and other operating requirements for fiscal 2008 and for the foreseeable future.

Cato Corporation has also increased its dividend per share payment to $0.165 from $0.15 this time last year and has reduced it’s weighted average shares by over 2 million shares.
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I’m keeping these stocks on my watch list.

At this time CBK looks like the best value at it’s current price, and will look even better if it continues to drop. I think investors are overselling on the news reports. It could be that CBK may just be lowballing estimates in hopes that the price will rebound if they beat their low estimates. But, that’s just pure speculation on my part. IMO, they’re not doing as bad as perceived and are in good financial shape.

Since it’s taken on some debt, SMRT seems less appealing to me now then when I first put it on my list. I’m also not too sure that its only the economy that’s causing SMRT’s poor sales. However, if the price keeps dropping it could be a great buyout candidate.

CHS? I’ll keep it on my list, but I think this is a company that could easily go bad. With all the brouhaha concerning executive overcompensation, I have concerns that management may be there only to lines their own pockets.

While CTR is doing the best in terms of sales and profits, the stock price hasn’t actually dropped enough for me to consider it undervalued just yet.

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