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In my previous article on teen retailers, I compared the operational metrics and performed relative valuation for three teen retailers namely Abercrombie & Fitch (ANF), Aeropostale (ARO) and American Eagle (AEO) and came to the conclusion that ARO was not only the best run company, but it also offered the best return potential between now and January 2013.

In the comments section, some other retailers were mentioned. As most of these companies were not my radar, I decided to run some preliminary numbers and look into those names to compare them to the teen retailers I closely follow. The three companies that I will evaluate in this article are The Buckle (BKE), Ascena Retail Group (ASNA), and Express (EXPR).

Of the three companies, Express has the least trading history having gone public in May, 2010. ASNA is a specialty retailer for women and tween girls, and operates stores under the Dressbarn, Maurices, and Justice brands. Buckle is also a specialty retailer primarily dealing with casual apparel for young men and women. The financial years for both BKE and EXPR end in January while ASNA closes its books for the year in July.

As in my previous article on teen retailers, I compared the Cash Conversion Cycle (CCC) for the three retailers. It should be noted that Days Receivables Outstanding was not considered as part of the CCC calculation. The table that follows presents the CCC for BKE, ASNA and EXPR. Additionally, the CCC calculated in my previous article for ARO is also shown. Kindly note that data was only available for the last four years for EXPR.

Cash Conversion Cycle (Days)

BKE

ASNA

EXPR

ARO

2006

64

26

-

14

2007

54

24

-4

13

2008

46

27

1

13

2009

46

21

7

12

2010

41

24

18

12

TTM

41

27

18

12

As shown in table above, the CCC for ASNA has ranged from 21 to 27 which is good in my opinion. BKE has a comparatively higher CCC, but the good news is that its CCC is in a downtrend. The Days Inventories Outstanding (DIO) has reduced from 79 days in 2006 to 61 days in 2010. Express sported a negative CCC in 2007 as its Days Payable Outstanding was greater than its DIO. However, the CCC for EXPR has gradually increased to 18 days. It will be interesting to monitor this trend in coming quarters. Of the six companies analyzed, ARO has the best and the most consistent CCC.

Next, I investigated the historical return on invested capital. Here again, ARO wins by a mile. However, the ROIC for BKE is encouraging. As was the case with CCC, the ROIC has dramatically improved from 19% in 2006 to 39% in the 2010. ASNA also boasts of a solid and steady ROIC.

EXPR has turned a corner. After reporting losses in 2007 and 2008, the company has delivered strong returns.

Return on Invested Capital

BKE

ASNA

EXPR

ARO

2006

19%

15%

-

36%

2007

24%

17%

-1%

51%

2008

31%

11%

-4%

54%

2009

37%

9%

14%

58%

2010

39%

15%

25%

53%

TTM

39%

15%

25%

53%

Coming to historical growth rates, BKE has generated consistent growth over the past 5 years averaging approximately 14%. Analysts however expect the company to grow at a slower rate in the future (about 10%). EXPR grew by 14% in the last quarter compared to the 11% year on year growth and 2% average 3 year growth. Analysts expect the company to grow at a similar rate for the next 3-5 years. ASNA acquired Tween Brands in November 2009 which was the primary reason for the impressive 59% year over year growth and also for the high 3 year and 5 year growth rates. Going forward, analysts expect a growth long term growth rate of approximately 14%.

Revenue Growth Rates

BKE

ASNA

EXPR

ARO

Last Quarter

10%

27%

14%

5%

Year on Year

6%

59%

11%

8%

3-Year Average

15%

19%

2%

15%

5-Year Average

14%

19%

-

15%

When it comes to margins, BKE and EXPR both outperform ARO, reporting impressive margins of 22% and 25% respectively.

Operating Margins

BKE

ASNA

EXPR

ARO

2006

14.91

10.15

-

12%

2007

17.68

10.86

-1.42

13%

2008

20.48

7.8

-4.36

13%

2009

22.2

7.03

13.7

17%

2010

22.19

9.16

25.45

16%

TTM

22.19

10.06

25.45

14%

Based on operation metrics and profitability, of the six companies that I evaluated, ARO still occupies the top position on my list followed by ANF and BKE. Although I like EXPR, I would prefer to monitor the company over the coming quarters to get a better sense of the company fundamentals.

Valuation:

Since I do not closely follow the three companies analyzed in the article, I relied upon consensus analyst estimates to develop my price targets for January 2013. As mentioned earlier, ASNA ends its fiscal year in July. Therefore, to come up with TTM EPS for January 2013, I grew the 2012 EPS estimate by the projected long term growth rate.

Analyst average estimates for financial year ending January 2013 revenue and EPS estimates for the three companies are shown below:

BKE

ASNA

EXPR

Revenue (millions)

Average Analyst

1,050

3,214

2,200

EPS

Average Analyst

3.11

2.75

1.78

Next, based on historical analysis, I developed estimates for future P/E and P/S multiples using data for the last 10 years. For EXPR, since the data was only available for current year, I developed estimates using data from similar companies (as identified by growth rates, market capitalization, margins etc). The estimates and the resulting future fair values are shown below.

BKE

ASNA

EXPR

P/E

Estimate

14.05

15.34

14

Fair Value

$44

$42

$25

P/S

Estimate

1.7

0.9

0.9

Fair Value

$38

$38

$22

Average Price Target

$41

$40

$24

Current Price

$40.54

$33.2

$19.31

% Return

1%

20%

22%

* - As of April 6, 2011

Based on my analysis, BKE is currently overvalued in my opinion and would offer the least return. EXPR and ASNA are projected to offer similar returns between now and January 2013. For comparison, in my last article, I estimated that AEO, ANF and ARO would increase by 16%, 41% and 51%, respectively during the same time period. ARO continues to be the best risk reward opportunity in my opinion.

Source: Analyzing Return Potential for Specialty Apparel Retailers