Dress Barn DBRN
December 28, 2007 - 1:44am EST by
trev62
2007 2008
Price: 13.00 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 782 P/FCF
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT

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Description

Dress Barn is a magic formula stock with a 40 year history of stable, conservative management and consistent growth.  Since its listing in 1983 the company has only had one year of negative sales growth and has been profitable every year.  While this is a simple and boring story, DBRN has a rock-solid balance sheet, a high ROIC, is buying back shares rapidly, and contains a large growth opportunity in the Maurice’s chain that it bought in 2005.  Like most retailers the stock has been crushed recently, falling 52% since its 2006 highs, and is currently trading at less than 10x earnings.

Paul118 wrote up Dress Barn back in June 2000.  While recommended as more of a trading opportunity at the time, DBRN would have made for a great long-term investment despite being recommended shortly before a U.S. recession.  After the recommendation the stock rose nearly four-fold by 2006 and even after the recent fall the stock remains up 138% while the S&P 500 is flat since June 2000.  Despite the strong performance the stock is currently trading at or near all time low valuation levels and also appears cheap relative to its peers: 

DBRN

Current

6/2/2000

Avg since 1989*

PE (LTM)

9.6

11.6

16.9

EV/EBITDA

3.7

3.1

5.3

Price/book

1.6

1.7

3.0

Price/sales

0.5

0.7

0.9

*Using all quarter-end data points according to from FactSet, 1989 is the first year quarterly data is available

 

DBRN vs. Comps:

 

 

DBRN

Charming (CHRS)

Talbots (TLB)

Ann Taylor (ANN)

Cato Corp

(CTR)

Kohls (KSS)

PE (LTM)

9.6

11.1

N/A

13.3

10.6

12.6

PE (FY1 )

9.9

20.0

N/A

12.0

14.6

12.6

EV/EBITDA

3.7

3.8

8.2

4.5

3.6

7.0

Avg ROE (last 5 years)

15.6%

10.0%

15.0%

10.9%

17.8%

16.9%

Avg revenue growth (per annum last 5 years)

43.0%

38.3%

-21.6%

12.5%

10.3%

15.8%

Est. revenue growth (per annum next 5 years)

16.3%

12.7%

14.8%

15.2%

16.3%

17.4%

  * All numbers from FactSet or Yahoo, and calculated with consensus estimates

Two other competitors have also been acquired in recent months – Deb Shops and United Retail Group, with both deals closing in October.  Again, the numbers appear favorable for DBRN:

 

 DBRN

(Current)

Deb Shops

(DEBS)*

United Retail (URGI)*

Acquirer

N/A

Lee Equity Partners

Redcats

PE (LTM)

9.6

18.4

24.9

Price/EBITDA

4.0

9.0

10.3

Avg ROE (last 5 years)

15.6%

12.6%

-2.4%

Avg revenue growth (per annum last 5 years)

43.0%

1.4%

2.3%

*Using buyout value and most recently available twelve month period

 

To be fair DBRN’s 2005 acquisition of the Maurice’s chain inflated the short-term growth numbers for the company.  Stripping out Maurice’s the company grew its core business organically around 5-6%.  While the acquisition contributed to the bulk of the strong growth numbers above, Maurice’s has continued to grow at a nice clip, with sales rising 16% during its first full year as a part of Dress Barn, and that segment now makes up over 37% of the overall company’s revenue.  Fortunately, not much growth is needed given the dirt-cheap valuation.  While I think the 16.3% expected growth rate mentioned above is likely too high, even with low single digits growth over the next few years the stock remains attractive.  DBRN also has strong cash flow generation – for the last 3 years capex as a percent of EBITDA has been just 30%, 27%, and 33%.

Company Background

Dress Barn is an 821-store chain that sells casual clothing to women, both regular and plus size.  The company prides itself on offering in-season, decent-quality career and casual fashion at value prices, all in a comfortable, well-located store staffed by well-trained service people.  While this is all quite basic “blocking and tackling” for a retailer, not many companies have a 40 year history of successful execution under the same management team.    

The company was founded in 1962 by husband and wife Elliot and Roslyn Jaffe with a single store in Stamford, CT.  DBRN has been Jaffe-run ever since and Elliot remains the Chairman of the board after stepping down in 2002.  Elliot’s son David Jaffe took over as CEO after working at the company since 1992.  While tight family control is not always a good thing, in this case David has an impressive resume on his own: Wharton undergrad, Stanford MBA, Portfolio Manager at Merrill Lynch, and seven years as a General Partner at the private equity firm that is now J.P. Morgan/Chase Capital Partners.  His PE background is apparent in the way he speaks about capital allocation, potential acquisitions, share buybacks, etc.  Together the Jaffe’s own over 25% of DBRN’s shares.    

The company also owns a 607-store chain called Maurice’s which it bought in 2005.  Maurice’s stores are generally located in smaller towns and focus on a younger client than Dress Barn.  Dress Barn’s typical client is mid-30’s to mid-50’s, while Maurice’s is 17 to 34.  While you will find Dress Barn stores in big and mid-sized cities like Naperville, IL, Greensboro, NC, and Rochester, NY, Maurice’s are typically in towns like Forsyth, IL, New Bern, NC, and Batavia, NY with populations under 100,000.   New stores in both chains have attractive cash-on-cash characteristics, typically becoming profitable within 12 months of operations.              

Balance Sheet/Buybacks/Potential Acquisitions

DBRN has a very strong balance sheet, ending last quarter with $198 mm in cash and just $145 mm in total debt.  The company leases all of its stores and has consistently bought back shares for the past 10 years, purchasing 1/3 of its share base over that period.  DBRN recently completed a $75 mm share repurchase program and the board has authorized a new $100 mm program, which would amount to an additional 13% of its shares.  Management appears interested in buying these shares, but only if the long-term numbers are more attractive for doing so relative to making a new acquisition, which it is also actively considering.  Given Jaffe’s PE background and the success of the Maurice’s acquisition I believe that management will make the right capital allocation decision for shareholders.  In retrospect DBRN paid less than 4x EBITDA for Maurice’s, a company that came with a stable management team (and thus less operational risk for DBRN) and should grow in the mid- to high-teens for a number of years.

Given its strong balance sheet and savvy management team I believe Dress Barn is well-positioned to take advantage of the current carnage in the retail sector.  Until recently David Jaffe was patient with the company’s cash hoard, saying in May that prices were too high to make an acquisition:

5/30/2007: “At $216 million, our cash position provides a significant war chest for acquisitions. Unfortunately, we have become discouraged by high prices and lack of opportunities that meet our acquisition criteria.” (Conference Call)

 

9/12/2007: "Prices have come down a lot, and we've been looking; I won't deny that.  If something came along today, we're in position; we've got the board's blessing and the balance sheet." (LBO Wire)

 

Summary

This is a relatively simple story and the risks are as well.  It’s hard not to worry whether a relatively small women’s retailer with the word “Barn” in its name is really a durable long-term business with any competitive advantage.  The company’s stellar history and strong management team mitigate this risk somewhat, and at the current valuation DBRN does not need to be considered a great company to be a successful investment.  However, this remains a boring company that not many Wall Street analysts or their wives have ever been to, and even if the numbers stay strong it’s certainly possible that sentiment around the company will remain negative.  A continued weak consumer environment or full-fledged recession would also hurt DBRN’s short-term numbers and could compound the sentiment problem. 

Overall I believe that the market is already discounting an overly negative forecast for the company.  Dress Barn is trading at less than 10x earnings with a high ROIC, an exceptional management team, and 40 years of experience growing steadily through various economic cycles.  Given that I believe that the company will successfully navigate the current consumer turmoil and should come out of the downturn in an improved position given its strong balance sheet and potential buyback and/or acquisition.

Catalyst

• Continued steady growth and profitability
• Continued share buyback and/or acquisition
• Signs of improvement in overall economy
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