Description
JLM Couture (JLMC) stock provides an opportunity to buy a company in a simple business with a solid history of profitability at a price slightly below net working capital and at about eleven times depressed earnings. The stock has recently sold off over 40% from last year’s high due to a weak fourth and first quarter performance. My expectation, based on the company’s history and comfort with management’s focus on profitability, is that the company’s current performance is a short term problem which will show improvement over the next six months. I believe that the current price weakness provides an excellent buying opportunity.
Bridal Gowns
JLM Couture was organized in April 1986 and is currently in the business of designing, manufacturing and marketing high quality bridal wear and related accessories, including bridesmaid gowns under the "Jim Hjelm," "Lazaro" and "Alvina Valenta" lines. The company emphasizes contemporary and traditional styles characterized by ankle or floor length gowns, with or without trains, and are principally constructed in satin, silk and lace. Wholesale prices for the Company's bridesmaid and bridal gowns range from $90 to $150 and $500 to $3,000, respectively, with suggested retail prices ranging from $180 to $300 for bridesmaid gowns and $1,000 to $6,000 for bridal gowns.
The company manufactures its products at both its own facilities and through hiring independent contractors. The Company utilizes bridal boutiques or bridal departments in women's clothing and department stores to market its gowns.
Historical Performance
The company’s historical performance follows:
Income Statements
($ Thousands)
Year Ended October 31,
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1999 2000 2001 2002 2003
------ ------ ------ ------ ------
Net sales 18,098 20,032 21,420 24,702 26,041
Net income 880 749 666 1,109 808
Net income per common share
(diluted) .43 .36 .34 .53 .40
First Quarter (January)
2004 2003
--------- ---------
Net sales $5,320,696 $5,653,948
Cost of goods sold 3,265,627 3,240,696
--------- ---------
Gross profit 2,055,069 2,413,252
Selling, general and
administrative
expenses 2,005,171 2,065,614
--------- ---------
Operating income 49,898 347,638
Interest Income, net of
Interest expense of $641 and
$2,837 for 2004 and 2003,
respectively 3,648 2,867
--------- ---------
Income before provision
for income taxes 53,546 350,505
Provision for income
taxes 22,000 150,000
--------- ---------
Net income $ 31,546 $ 200,505
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Net income Share:
Basic $ 0.02 $ 0.10
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Diluted $ 0.02 $ 0.10
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Three months ended January 31, 2004 as compared to three months ended January 31, 2003.
In fiscal 2003 the company experienced modest revenue growth and was hit during the latter part of the fiscal year by slowness in bridal retail activity among bridal retail stores, nationally. During the year the company tried to maintain its market share by continueing to increase its promotional spending and product development. Earnigs were reduced by renewing certain leases at higher rates and the signing of new leases needed for expansion. In addition company president, Joseph Murphy noted that “along with a charge relating to canceling certain stock options, and the company's modest revenue increase, impacted the company's earnings growth”.
For the first quarter of fiscal 2004 revenues decreased 6% over the same period a year ago. The company attributed the sales decline to reduced demand for the company's products in the current economic environment as there is a trend to simpler weddings. The company noted that, “Post 9/11 there was a jump in weddings. This increase has subsided as time goes by, and the weak job market forces people to make tough economic decisions.” In the quarter gross profit as a percentage of sales decreased to 39% from 43% as there were higher fixed production costs that were spread over lower sales. As noted above, during the past year the company’s production facility lease was renewed to include more space. Additionally, the renewed rent included an increase. Earnings declined primarily due to the decline in sales and a weaker gross profit margin, stemming from an increase in fixed costs due to the expansion of its production facility and staff during 2003. The company is instituting cost control measures to counter these expense increases.
The Balance Sheet
The balance sheet is rock solid. The company has a current ratio of 4.2 and not debt. Net working capital is $3.84 per share and tangible book is about $3.87 per share. The auditor is Goldstein Golub Kessler LLP which enjoys an excellent reputation in the New York financial community.
Outlook
Given that weddings are typically planned a year or more in advance, the company is still experiencing the impact of last year’s slowdown due to the Iraq war and the recession. It is therefore reasonable to expect that the company’s performance to lag the economy. One would expect the current economic recovery and job expansion to begin to be reflected in the company’s results over the coming year. We should begin to see sales and earnings from customers who planned their weddings toward the end of last year and the beginning of this year toward the end of this year. A conservative estimate for this year is about $.30 to $.35 cents per share in earnings, which would result in the stock selling at about 11 times earnings. As the impact of the recovery is fully realized by the company, earnings should recover to the $.45 per share level.
Concerns:
1) The recovery in wedding dresses may not materialize and the recent trend is a structural change in the industry. People migrate to simpler weddings and avoid the traditional expensive wedding gown. This is certainly possible, but unlikely. The traditional wedding has been a mainstay of America for centuries. On the contrary, the company believes that there exists an opportunity for expansion in its market
2) The company has a limited float. The company has 1.9 million shares outstanding. Insiders hold about 800,000 shares and another 480,000 shares are held by 10% holders. This leaves a float of about 620,000 shares. This makes the shares relatively illiquid as they trade about 6,000 shares per day.
3) Joseph Murphy, the CEO, holds almost 37% of the shares outstanding which allows him to just about control the company.
Summary
This is a simple story. We have a company in a very straight forward business with a history of generating good profitability that has been impacted by what is reasonable to conclude is a short term cyclical problem. We can purchase this company for about 11 times depressed earnings and at less than it’s net working capital. There are not many of these opportunities in this current market.
Catalyst
The catalyst here is the expectation of a strong earnings recovery as the company experiences the lagging effect of the recovery in employment and the economy.