Shareholders in apparel retailer Christopher & Banks (NYSE: CBK) have probably not been too pleased with the company's stock price trajectory in 2014, down more than 40%. The company has been hurt by a decline in customer traffic volumes at its stores, a trend that has led to lower sales tallies in FY2014. On the upside, though, Christopher & Banks continues to benefit from lower overall inventory markdowns, which has allowed it to post a relatively sizable uptick in its adjusted operating profitability during the period, up roughly 200 basis points, culminating in a 63.8% increase in operating income. So, at its discounted price, is the company a good bet for investors?
What's the value?
Christopher & Banks is a niche player in the apparel retailing space, operating a network of more than 500 stores that cater to a target customer base of middle-aged, working women with a diverse assortment of casual and ready-to-work attire. The company has spent the past couple of years trying to manage its way through a comprehensive restructuring initiative, after a failed move into more fashionable, higher-priced product offerings led to a string of annual operating losses from FY2010 to FY2012. The crux of Christopher & Banks' turnaround bid has been a return to its roots as a purveyor of traditionally-styled, affordably-priced apparel, as well as a focus on being a more efficient operator by closing underperforming stores and eliminating related store support costs.
Fortunately, Christopher & Bank's turnaround plan seemed to gain traction in its latest fiscal year, evidenced by a roughly 700 basis point improvement in its adjusted operating profitability that culminated in positive operating income, its first positive year since FY2009. During the period, the company was positively impacted by higher sales productivity, with its sales per square foot up 8.7%, as well as from a more favorable product pricing environment, which led to a sharp uptick in its gross margin. Not surprisingly, Christopher & Banks generated better operating cash flow, fueling its ability to pursue its growth initiatives, including an expansion of its presence in the outlet area.
Looking into the crystal ball
The question for investors is whether Christopher & Banks can post profit growth in the future, thereby providing a foundation for a higher market valuation. On that score, things seem to be looking pretty good, judging by the company's aforementioned increase in adjusted operating income in FY2014. The company has continued to enjoy positive sales productivity during the current fiscal year, with its sales per square foot up 2.4%, as well as receiving a favorable margin impact from a continued rise in average product prices. On the downside, though, Christopher & Banks seems to have lost some of its sales momentum lately, as illustrated in the below table, a trend that could lead to more promotional activity and make future profit growth a more difficult goal to achieve.
|Comp. store sales growth||(7.6)%||2.6%||(0.2)%|
Source: Christopher & Banks 3Q2014 10Q Report, 2Q2014 10Q Report, 1Q2014 10Q Report
Of course, Christopher & Banks isn't the only women's apparel retailer struggling under the weight of declining sales momentum in the current selling environment. Competitor Chico's (NYSE: CHS) has also posted relatively weak sales growth lately, reporting a modest 1.5% increase in total revenues during its latest fiscal quarter that was negatively impacted by a decline in comparable store sales across its major brands. The lack of sales momentum during the period forced the company to utilize a greater amount of discounting activity in a bid to drive customer transactions, culminating in an 80 basis point decrease in its gross margin. The net result for Chico's was a 23.9% drop in its adjusted operating income, a performance that has led to a down year for its stock price in 2014.
The bottom line
Christopher & Banks is certainly cheaper than it was at the start of the year, after a double-digit stock price decline to-date in 2014. That being said, there seems to be a reasonable basis for that price action, given the company's fading profit growth that has undoubtedly caused the market to re-price the amount that it is willing to pay for Christopher & Banks' earnings. More importantly, with management seemingly showing little optimism for profit growth in FY2015, the company is not exactly cheap at a forward P/E multiple of 15. As such, there seems to be little momentum to drive a higher market valuation at Christopher & Banks and investors should probably avoid the story.
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