I like Claires, the teenage accessories chain with all the babbles and doo-dads which go in and out of fashion. Currently with 3054 stores at the end of Q2, Claire’s sells costume jewelry, handbags, apparel to teenagers and young women. They also own Mr. Rags, a growing apparel chain for young men.
Oh goodness, not another stupid retail idea. Yep. Frankly, I don’t share the concern that we’ve got too much retail here. I’ve done extremely well in this area, and see no reason to seek out the obscure and narrow things when retail can be so easy to evaluate. At the very least, we get a one month read on how the business is doing and can therefore take appropriate steps to adjust the position. We know trends persist. We know increasing SSS are likely to mean increasing margins. We know how to read balance sheets. We know the stores. We can count the stores and estimate the growth rate. We can get a read on saturation. And we know people act like deranged monkeys in this area - esp. the offball stock analysts who scream ‘sell retail’ in its entirety and bazooka the entire sector regardless of who is doing well or badly -- so if we keep our heads we can take advantage of the idiocy.
On the surface, you can mistake CLE for one of the teenages they sell to - highly emotional, subject to wide swings, and impulsive. You might think that by looking at the high/low on the stock price: in 95, 10 to 5; in 96, 26 to 7m; in 98 24 to 14; in 99 37 to 15, etc. But look deeper and you find the following beauty marks under the acne (see pg 1687 in VL):
· blowout ROE numbers. Since 1993, ROE is generally over 20% and that’s with a mostly clean balance sheet; this is a GOOD business
· a dominating niche. Walk the malls or strip centers. Who sells custom jewelry to teenagers? Claire and….and….and….nobody else, that’s who.
· a clean balance sheet. It is a bit more debt heavy than usual after last years’s acquisition of Afterthoughts, their only competitor. Go back to the end of year balance (looking at mid year balance sheets can be misleading because of the importance of Xmas) for 1/99 and you find 153m in cash and 80m in TOTAL liabilities. End of 1/00 shows 140m in cash, 109m in inventory, and 309m in total liabilities.
· lots of cash flow and a low PE. End of year cash flow (net income + depreciation) was 117m. This is with a current market cap of only 982m, or more than 10% of the entire value of the company. The trailing PE is 13 though that is including a down Q2 which likely won’t be repeated. Based on the 2.25 VL esimate for 1/2001, the forward PE is 8.7.
· plenty of expansion opportunities. The company is still integrating its Afterthoughts acquisition, but the apparel chain offers expansion possibilities and international expansion could support - per management - up to another 1000 stores in Europe alone. With their cash flow, they can also explore acquisitions.
· an intelligent management team. That’s my opinion at least, but they’ve backed up my thoughts by buying shares from time to time and giving logical answers to questions on their conference calls. They also own a bundle of the shares here (proxy shows 71.8% ownership of the Class A shares, 9.7% of the common). The Chairman is also the Class A majority owner, and since he is 83 constant rumors float that one day he might be interested in selling the company.
· and most important, in the short term at least, same store sales are beginning to move upward and comparisons vs last year are far easier. Here’s the numbers for the last 12 months: even, -4, -2, flat, +5, -4, -3, -11, +6, -2, -1, and flat. Notice the last 3 months? In the 2Q conference call, management said that SSS trends ‘were encouraging’, a buzzword for up 99% of the time.
What could go wrong here?
· SSS go down. SSS play a death match with margins, so if SSS were to continue negative earnings would suffer as they have in the first half of the year.
· gross margins are expected to be down in Q3 even with a projected 3% rise in SSS (though they would have a higher gross margin number in Q4 with that situation)
· the law of large numbers. CLE has a large store count, so to maintain a double digit growth rate is gonna be tough. Lots of stores to open, and the international area is still not conclusive though it is per management ‘encouraging’. Also, acquisitions carry their own risks, but CLE appears to stay in their chosen target market.
· inventory risk. This is a fashion oriented business, and you have to prepare yourself for the inevitable problems in this area.
· volatility of the stock price. Get set for a wild ride.
If it matters, CLE does respond to good news. It has wide analyst coverage and strong institutional - if nuts - interest.
Positive SSS comparisons leading to higher margins and positive earnings comparisons