Justice for Tween Brands

The owner of the Justice and Limited Too brands that focuses on the tween girls category (7-14 year olds) has been crushed by the markets and the weak economy.

Oddly though, Tween Brands (TWB) has been crushed much more by the markets then the likes of Children's Place (PLCE), Gymboree (GYMB), and Pacific Sunwear (PSUN). Was it because of the the move to transition all of the Limited Too stores to the much better performing Justice brand?

If so, the market was placing a huge execution discount on the stock.

All four stocks recently reported Q1 numbers through the end of April and clearly TWB and PSUN had the worst numbers; consequently, they have the lowest market caps. Both GYMB and PLCE reported pretty decent numbers and hence they have the highest market caps.

But that's where the market quits making sense. PSUN has a market cap nearly double that of TWB - $255M vs $125M - even though TWB posted better results actually recording an operating profits versus the $8M loss at PSUN. That's after TWB's huge 20% gain yesterday.

With comparable sales, stores, and square feet, you'd expect a slightly higher valuation for TWB. Look for this to happen over the next few weeks as investors clue in that TWB is a survivor.

Now GYMB and PLCE are definitely solidly profitable and better off then TWB, but its hard to imagine that they are worth 10x that of TWB. GYMB has similar revenue, but much higher profits owing partly to much lower square feet and hence costs. TWB has 3.8M to the 1.7M at GYMB. TWB did have higher volumes prior to the last year so they'll need to get the revenue back to justify the much higher square footage. Some pruning off the base may significantly help margins.

PLCE, on the other hand, reported nearly double the revenue including higher numbers YOY, but not much more in income then GYMB. GYMB definitely has the margins up while PLCE makes the profits off of volume. Either way, they are both performing much better then TWB.

It's very possible that TWB will see a snapback in revenue as the transition to Justice has very possibly hurt sales in the former mall-based Limited Too locations. The off-mall Justice locations are definitely attractive with the mall no longer the top destination for a lot of people.

On the recent conference call, management discussed the huge savings in marketing expenses last quarter that will be ramped up some now that the transition is basically complete. A return to growth could rocket this stock. Based on the competition, I'd have to estimate the valuation of this stock more correctly in the middle of these other stocks or roughly $500M or $20 per share.

Looking at Tween's prospects, they used to generate in the $2-3 range of earnings per share. They also forecast back in August that they would generate savings of $20-25M from the transition to Justice. This would put earnings closer to $4 assuming they don't lose customers that really just wanted the Limited Too concept. Even assuming they really get zero benefit from the transition they could just be back to $2.50 in earnings placing the stock back to the $30s.

Now they also seem to have the opportunity to up margins from reducing the square footage or at least maximizing what they have instead of adding more stores. That's a subject to visit with management once the economy rebounds; for now ,we'll be content with a rebound to more normal valuations.

Yesterday was a good start with soaring consumer confidence. It seems that shareholders are finally getting some Justice in this market.

Disclosure: Long TWB and PLCE in personal and/or client accounts

Comments

[TheCaptain:]

Why are you comparing stores with such a difference in age? PSUN is teenagers, TWB is that pre-teen age, and the other two are for babies and toddlers. GYMB and PLCE are good pairs to look at, and perhaps even add in TWB, but PSUN?

May 27 04:44 PM

[Stone Fox C...:]

They are all similar retailers but of course to different age groups. Its a valid comparison with naturally GYMB and PLCE being the best. Of course you need to take the differences into consideration. Do you think one age group is more valuable then the other?

Name 2 retailers that are 100% equal. HD and LOW get compared all the time, but HD is more urban and has much higher contractor sales. In reality they have a huge demographic difference not commonly stated. Same issue here.

Jun 02 02:11 PM

[baduch:]

All i know is that my 8 year old and 6 year old and all of their friends are big justice fans! Im long

Jun 03 09:30 AM

[RWCMom:]

Babies & toddlers grow faster in shorter periods of time than tweens so higher turnover. Also, parents are superfocused on doing everything "right" at the very beginning and spend more money until they figure out that good parenting cannot be purchased.

Jul 01 12:45 PM