Description

New York & Company is a compelling investment.  The stock remains attractively valued despite showing steady progress over the past 18 months and still has a significant runway to drive the top line and further enhance margins.  NWY’s stock price has the potential to more than double in the next couple of years.

NWY is a specialty retailer of women’s fashion apparel and accessories in the U.S. and offers a range of wear-to-work and casual apparel and accessories at compelling values.  The company operates 512 stores in 43 states and the core customer is 24-45 years old.

Greg Scott became CEO in early 2011 and has executed on a deliberate path to improve the merchandise, inventory controls, marketing, traffic, systems, real estate footprint/make-up and the e-commerce strategy. Margins have improved in each of the past six quarters but remain well below historical average, prior peak, longer term management goals and peers.  

The EBIT margin opportunity is substantial.  Historical EBIT margins are around 4.0% with a peak of 9.0%+ and are currently in the slightly positive range (though still below 1.0%).  This is a material improvement from the decently negative EBIT margin results during Greg Scott’s first year at the helm and in each of the three years prior to that.  Management believes they can exceed prior peak margin levels in the next several years.  I think NWY’s stock will be significantly higher even if they don’t fully achieve their goals.  There are several ongoing initiatives that have helped improve margins to date and should help enhance them going forward.

The company has done a much better job of maximizing sales and profitability during peak traffic times of the year and reducing markdowns through efficiencies and streamlining of business processes.  Clearance levels have been better controlled as systematic inventory management initiatives have been put into place.  Now that management has implemented better merchandise/inventory strategies, they have focused on further building the brand and traffic.  The company recently launched a celebrity collaboration with its Eva Mendes line.  This should help drive traffic, add a product category, expand the customer base and increase conversions.  I was impressed by the PR campaign and the early chatter is that this measured launch was successful which is telling in a difficult retail environment.  Further brand building/marketing initiatives are underway.

Management has and will continue to focus on its real estate mix and e-commerce opportunity.  E-commerce is only 8% of sales vs. many peers at higher levels and management has several initiatives aimed at closing the gap/reaching its goal of 15%.  E-commerce sales deliver higher margins than NWY’s retail locations and the site will be re-launched in the second half of the year.  The new platform is expected to have an improved design/functionality and should benefit the top line and profitability.  The management team has significantly rationalized the real estate as many underperforming stores have been closed in a cost effective manner and there is the potential for additional store closures.  The mix of the real estate is changing and that dynamic is also helping to enhance margins.  Off the mall and outlet locations are higher profitability than mall locations and both will continue to become an increasing percentage of the total store base.  The number of outlet stores (which have performed well) will continue to increase toward 75-100 locations from 45 today (they had 24 in 2010, 0 in 2009).  Outlets are ~9.0% of the total store makeup today and the company plans to expand made for outlet merchandise from roughly 50% of the inventory today to 80-95% over the coming two years which should further aid margins. 

NWY is currently trading at 0.3x 2013 revenues while comps typically trade at 2-3x that.  At the same time, a clean balance sheet (net cash per share expected at year-end is over 20% of the market cap) gives the management team time to get the retail turnaround right. Assuming 5.0% EBIT margin, a 0.6x TEV/revenue multiple/5.5x EBITDA multiple/~14.5x PE multiple (ex-cash and fully taxed) would yield almost 75% upside by 2015.

Irving Place owns 50.3% of the company and bought NWY from Limited Brands in late 2002.  Irving Place helped take the company public in late 2004 and my understanding is that they remain actively involved in the company/Board.  Given the 10+ year holding, at some point I think it is reasonable to expect them to want to monetize their investment, likely through a sale of the company.  There has been private equity activity in the retail space at decently higher multiples and I believe a takeout here is a possibility. 

This posting is solely for the evaluation of club members and is not a recommendation to buy or sell this stock. The views expressed are those of the author individually and should not be attributed to any affiliated investment firm, which may or may not hold positions consistent with the views expressed herein and may buy or sell shares at any time.

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