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I know the stock market is not doing well. I know consumer confidence is dwindling. But when Mr. Market is having one of his downers, it's time to pull out the calculator and have a look at some decent businesses that may not be getting the attention they deserve.

I believe that Claire's Stores (CLE) is one of those kinds of businesses. Down about 26% from its peak of April (most of that fall occurred in May) the company continues to demonstrate significant profitability, predictability, and at this point, decent valuation characteristics.

Enterprise value is about $2.2 billion reflecting zero debt and just under $400 million in cash. CFFO for last year was $243 million with capex of $82.5 million for free cash flow of $160.4 million. Hence, a FCF yield of 7.3%.

Not a random occurrence. Free cash flow was generated in each of the last five years totalling $602 million. Dividends of $120.3 million were paid over that period. Share buybacks are non-existent but share issuance has been miniscule, amounting to less than $20 million. Dividend growth rate for five years is 52% i.e. they have treated shareholders as partners.

Valuation has just dropped below 9 times EV/EBIT. Less than 7.5 times EV/EBITDA.

ROIC on a TTM basis is 19.8%. Average ROIC in the last five years has been 16.6%.

Long term growth estimates range from 12 to 18%. Let's use 9%. Operating margins have been running near 18% recently. Lowest operating margins in the last five years were 7%, median was 14%. Let's use 14%. I come up with a DCF of over $30 using these very conservative inputs versus its current price of $26.12.

As of January 28, 2006, Claire's operated a total of 2,878 stores in all 50 states of the United States, Puerto Rico, Canada, the Virgin Islands, the United Kingdom, Switzerland, Austria, Germany, France, Ireland, Spain, Holland and Belgium. The company has two store concepts: Claire's Accessories and Icing by Claire's. About 29% of sales are outside the U.S.

Seems to me that even in the worst of economic environments, young girls will still want to be buying low priced accessories. As Ms Schaefer describes it in a recent interview with The Wall Street Transcript [subscription required], "We appeal to people 2 to 92 because when it comes to fun items that are well priced and impulse driven, we are the place to go."

Seems to me that even in the ugliest of stock market environments, investors will still want to own low-priced stocks.

Neither I, nor my family, or clients have a current position in Claire's Stores.

CLE 1-yr. chart:

Source: Claire's Stores: Still Fashionable Despite Hard Times (CLE)