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Peter Lynch often mentions that he looks for retailers or hotel chains at an early stage of their expansion. He likes to look for chains with a proven business model that just scale up their business across all the states of the USA.

Many very successful retailers did fit into that category during their life cycle, before reaching a market saturation that eventually slowed their growth. Wal-Mart (NYSE:WMT), Coach (NYSE:COH), Guess (GUES), Aeropostale (NYSE:ARO), the Gap (NYSE:GPS), Staples (NASDAQ:SPLS) or Advanced Auto Parts (NYSE:AAP) are among some of the best examples of land grabbing successes that yielded "multi bagger returns" before becoming slow growers.

One interesting company popping up is teenager retailer Tilly's (NYSE:TLYS).

"Tilly's, Inc., though its subsidiary, operates a chain of specialty retail stores featuring casual clothing, footwear, and accessories for teens and young adults in the United States". Source : Yahoo Finance.

Here are 5 reasons I like Tilly's at $18 per share:

  • Tilly's is a very profitable operation with a strong ROE of 40%.
  • The company operates just 140 stores and claims a potential to deploy up to 500 stores in the next 10 years.
  • The economics of each store are fairly compelling with a pay back of investment just above 18 months.
  • The company is still run by its founder who started the company 30 years ago.
  • At $18 per share, the implied growth of the company is just 9% per annum while the actual growth rate (due to stores expansion) is closer to 20% per annum. The company plans to deploy new stores at 15% per annum and same store sales grow at 4% per annum.
  • 5 out of 6 analysts have a "BUY" recommendation for Tilly's.

Fashion retail stores can have volatile results, since the tastes of consumers can change quickly. However, the odds seem to be in Tilly's favor at the moment.

Source: Tilly's: Growth At A Reasonable Price Could Provide Strong Returns