Tween Brands: Trading a Stock Everyone Hates

Tween Brands (TWB) is a specialty retailer with a target market of ‘tween’ girls aged 7 – 14 via 570 'Limited Too' and 184 'Justice' stores. They sell current fashion apparel, sleepwear, swimwear, footwear, personal care items, underwear and accessories. They offer access through their catalogs and their on-line website as well.

Tween Brands shocked the Street Thursday when they warned that their fiscal first quarter is likely to come in at $0.12 - $0.17 [including a 4 cent non-recurring charge] versus their previous guidance of $0.35 - $0.40. The shares dropped to a four-year low and are now at $17.45.

The news was received badly as TWB had reported better than expected earnings of $1.11 in the fiscal fourth quarter [ended January] versus $0.86 a year earlier. FY 2007 total EPS were $2.03 versus 2006’s $1.95.

Tween Brands was spun off from The Limited in August 1999. Since then, they saw EPS increase in 8 of the previous 9 fiscal years. The only dip in EPS came in FY 2003 when the numbers came in at $0.82 versus $1.38. The shares reacted badly then, as they did Thursday. TWB’s share price dropped 60.8% from its 2002 high of $34.50 to a 2003 low of $13.50.

When earnings hit bottom at $0.82 in 2003, the P/E on the depressed earnings was 16.5x.

How did those crazy enough to buy during that down year do? From 2003’s low point Tween Brands shares climbed back to $44.50 at their peak in 2006 – a gain of almost 230%.

We can’t be sure where FY 2008 earnings are going to be but it should be noted that Tween Brands first half sales and earnings are seasonally weak every year. In FY 2007 about 77.3% of the year’s profits came in the second half. So weakness in the slow part of the year does not necessarily translate to the same impact for the full FY.

Prior to Thursday’s announcement, analyst estimates for FY 2008 were for $2.20. Even if you now assume the same 40% drop that occurred from 2002 to 2003, you’d see about $1.22 in forward EPS. Old FY 2009 estimates were formerly at $2.55, meaning $1.53 or better would be a somewhat pessimistic target for normalized earnings by then.

Tween Brands' average P/E over the past nine years has been 19.1x. Value Line is assuming an 18 multiple in figuring their 3 – 5 year target price range. Even 18 times the severely reduced FY 2009 estimate could bring these shares back to $27.54 over the next 18 – 24 months or up 54% from Thursday’s quote.

Other historical valuations suggest big gains as well. TWB has shown average price/sales of 1.15x since 2000 and an average price/book value of 2.4x over the past seven years. Even one times last year’s sales/share would bring TWB shares back to above $40. Twice 2007’s year-end book value leads to a better than $33 goal price.

Are my target prices of $27.54 - $40 reasonable? TWB shares hit peak prices of $32.70 - $49 in 2005 – 2006 and 2007. They’ve traded at least as high as $26.80 in seven of the past eight years. Even in their one previous down earnings year of 2003 they hit $23.70 at their high.

Has Tween Brands been a good performer long-term? Take a look at their numbers*:

* source Value Line, EPS exclude discontinued operations.

When bad news is released, few investors are willing to step up and buy shares even at bargain valuations. If you have a 12- 24 month time horizon, however, this may be a good time to take a position in Tween Brands.

An interesting way to play this with less timing risk is to write [sell] Leap put options on TWB for the year 2010. As of this morning you could receive a premium of $3.30 for the January 2010 $15 puts or $4.60 for the January 2010 $17.50 puts. Thus your break-evens would be $11.70 and $12.90 respectively. Both those break-even points are lower than the actual share price lows since 2001.

Disclosure: Author is short puts on TWB.

Comments

[CrossProfit_:]

Paul,

You said "We can’t be sure where FY 2008 earnings are going to be...".

Actually TWB has been one of the easier retailers for us to analyze as to where sales are going and how that correlates with earnings.

The stock is not necessarily a 'seasonal stock' as in trading lower in the first half of the year and trading higher in the second half. Examples of LOWER second half would be; 2002, 2003 and 2007. Granted that you did have three years in a row where the 2nd half was higher; from 2004 to 2006, though 2005 was only marginally a better second half.

For a visual of what we are talking about, compare the weekly close charts for 2006, 2007 and current 2008. The charts are here;

1) 2006 -> www.crossprofit.com/vi...
2) 2007 -> www.crossprofit.com/vi...
3) 2008 -> www.crossprofit.com/vi...

Please note that the evaluation line is NOT meant to depict a PPS, rather is to be used as guidance to determine if an investment opportunity exists.

Also note that TWB dropped from 30 to 25 BEFORE earnings was announced, so as you can see the company is pretty good at alerting analysts as to where the trend is going, or as we like to say - they talk our language!

Also note that from the 2008/2009 forward looking evaluation line, the "EOL" (end of line) is showing that based on fundamental analysis which is based on current growth projections, TWB loses our 'long vote' around the $23/24 range. It may hit $27.50 over the next 10/12 months, but we think (as of March 2008 when TWB annual analysis was completed) this would present a possible short term short opportunity.

CrossProfit

2008 Apr 13 04:55 AM

[Paul Price:]

I didn't say TWB'S stock price was seasonal but that they made over 77% of the PROFITS in the second half of their FY.

2008 Apr 13 07:55 AM

[CrossProfit_:]

Fair enough.

CrossProfit

2008 Apr 13 08:20 AM