By the Numbers: Mothers Work is a Cheap Retailer

When I do preliminary research on a stock, the first thing I'll usually look at is a bunch of numbers. Browsing financial data from sites such as Yahoo Finance and Morningstar, I find it easy to get a first impression on whether more research is warranted.

Here's a stock whose numbers are too cheap to ignore. Sometimes the stats I'll see online turn out to be wrong or misrepresentative, and there's always a lot of work to do on understanding what's driving the numbers, so please think of this as a lead in need of further research rather than as a full analysis.

Mothers Work (MWRK) calls itself, "the leading designer and retailer of maternity apparel in the United States." The company operates over 1,500 retail locations which include over 800 stores and over 700 leased departments within larger stores such as Kohl's and Babies R Us. I don't know of any larger player in the maternity space (except maybe her).

The stock closed yesterday at $16.96, down dramatically from a 52 week high of $57.65. MWRK trades at book value and at 3.75x EBITDA. From 1997 to 2006, the company grew sales each and every year, reaching $603 million in 2006. The market cap is $101 million, although with about $94 million in debt, the enterprise value is $183 million. The debt is 2.1x the low end of the company's guidance for adjusted 2007 EBITDA.

Aside from niche leadership and low valuation multiples, the (theoretical) turnaround potential here is remarkable. If Mothers Work can earn a modest 2% net profit margin without growing (ttm) sales and trade at 15x net income, the stock would be priced 75% higher. Reversion to the 52 week high would be a gain of 240%. A real turnaround would grow sales, grow margins, and fetch a higher multiple leading to a multi-bagger, but getting there can be a stretch.

I cannot yet make the argument that any of the above turnaround cases are likely to play out (recent same store sales results have been terrible) but this is an easy way of seeing whether there could be upside potential to justify further research on the stock.

Key questions that need to be answered before investing include: what's weighing on the company, whether the valuation multiples are real, why profit margins have historically been so lousy, whether sales growth will continue, whether there's cashflow to support the debt, and what are the prospects of a turnaround.

I don't own Mothers Work and am kept away by the debt, the historically lousy margins, and a sufficiency of retail turnaround situations already in my portfolio. If I'm missing something to the story here, please comment.