Dress Barn DBRN
June 02, 2000 - 6:25pm EST by
2000 2001
Price: 21.00 EPS 1.89
Shares Out. (in M): 19 P/E
Market Cap (in $M): 0 P/FCF
Net Debt (in $M): 0 EBIT 0 0

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I prefer stories that - in the words of my former boss's boss's boss's boss - 'even I can understand'. As a former engineer, I also prefer lots of pretty numbers vs. lots of pretty promises.

Yet another boring retailer, DBRN is a 691 store chain for casual clothing for woman, both regular and plus sizes. DBRN has the following charms:

1) Terrific Balance sheet. 158m in cash and 123m in total liabilities as of the end of the 3rd quarter (end 4/29). Note that this is even after the company has spent a bunch of cash on buybacks.

2) Low valuation & High Cash Flow. Sells for 1.7x book, 11.6x trailing earnings. Trailing cash flow is appx 50m. Trailing CapEx is appx 22m.

4) Smart management. Talk to the CFO and the impression you get is a person who knows what he is doing. More concrete evidence can be found with their buyback plan, as they have purchased more than 20% of their shares outstanding in the past couple years, and continue to be aggressive with the buybacks as opportunities arise. I was particularly impressed by the CFO's insistence on getting a good price with the buyback rather than going out and buying with no sense as to what the buyback is doing to the stock price (and what happens to that stock price when the buyback is over).

5) (Most importantly) Improving same store sales and easy comparisons. As you know, SSS drive retail stocks, regardless of what else is happening in the company. After 15 of the previous SSS numbers were negative or flat, the past 3 out of 4 have been strong, with the one problem number of -3 occurring in April, when weather had an impact. Easy comparisons follow until a +7 in Feb 00. Despite a new catalog and a web site, DBRN's margins have been expanding.

A few notes: Frankly, like most retail stocks this is probably a trading idea since their long term store growth rate of 9% isn't going to excite anyone. If you invest here, accept the volatility, as one poor SSS brings it down in a hurry, which can be a huge advantage if you can determine the reason for the decline. The entire woman's area has been picking up of late: TLB, URGI, CACOA, CHRS, and several others of this ilk have been posting good numbers -- this gives you some confidence that the trend in this area will continue (contrast that to teenage apparel which is getting killed). If you buy early in the morning, expect to get shafted here if you don't use a limit order (long story). As of the last proxy, insiders had 22% of the share outstanding. Insider have sold a few shares at this level but it is nothing to get excited about.

VL's 7/00 and 01 estimate is 1.75 and 1.95. However, they predicted 36c for Q3 and DBRN reported 44c, so those estimates are due to come up. A very similar story can be found at CACOA (80% ownership), but they are up against tough comparisons and management has been running it as a family business.

To sum:

Positives: 1. Good balance sheet 2. Cheap valuation. 3. Big buyback plan 4. High cash flow 5. Smart Management 6. Improving SSS and easy comparisons

Negatives: 1. Modest unit growth rate 2. One poor SSS and there goes the stock price 3. No barriers to entry (pure commodity biz) 4. Margins hit by catalog and web site 5. Interest rate environment/perception (even if no link with reality), esp. by 'universe of retail downgrading' analysts (which provide good entry points)

Small comment: I suppose I could use the 'we' title here since I represent a group of clients along with myself, but...


VL's median PE has been 14, and with SSS improving the stock has already moved. Further increases in margins, sales, and EPS should drive up the valuation (no promises of course, but DBRN - unike a CACOA - usually does respond to good news.
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