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Can This Omni-Channel Specialty Retailer Continue To Outperform And Beat The Sector?

In Q3 2015, the market overreacted and Christopher & Banks Corporation plunged because of a single-digit percentage downward revision.

The "low hanging fruit" isn't there anymore because the stock has rallied gaining 100% over the last five months.

However, this omni-channel specialty retailer remains debt-free while taking key initiatives to turn things around.

Based on the company's guidance for Q1 2016, the YoY improvement in sales trend and gross margin is obvious although the restructuring plan hasn't been completed yet.

There is still significant upside left, because the stock at $2.32/share isn't expensive in absolute or relative terms.

Introduction

Would you be interested in making 100% in just five months by buying a low-risk retailer in a challenging retail industry that has struggled with weather-related obstacles, high inventory levels and sluggish bricks-and-mortar traffic? I am sure, you would. Well, you could double your money in just five months if you bought Christopher & Banks Corporation (NYSE:CBK) at $1.28/share in Sep - Oct 2015, when I recommended the subscribers to my Premium Research buy it with both hands.

The company's stock hit $2.70/share a few days ago and currently stands at $2.32/share. Therefore, you understand now why I noted in my previous article that I will definitely pass Macy's (NYSE:M) at $44.5/share. And given that Restoration Hardware Holdings (NYSE:RH) currently stands at $37/share, now you realize why I recommended my subscribers short this luxury retailer at $105/share just five months ago.

As investment newsletter editor and stock picker, my number one purpose is to maximize my subscribers' returns by picking stocks that combine significant upside or downside potential with manageable risk, based on a 12-month investment horizon. And Macy's didn't fit the bill. But, Restoration Hardware did.

The Reasons For The Recent Collapse

It was back in September 2015, when the short-sighted market heavily penalized Christopher & Banks making it look like it's the worst of the bunch in the retail sector. Back then, the company's enterprise value plunged below $20 million just because many companies trade based on results relative to consensus estimates. The inexperienced investors always overreact to the news (good or bad) without digging into the fundamentals.

To me, that was the epitome of insanity. To me, that was the epitome of hyperbole, given that, among others, the company was debt-free while the holiday shopping season was coming. And, I always welcome a stock whose valuation goes to "head-scratching" levels.

That said, the stock collapsed in Q3 2015 for the following key reasons:

1) Revised guidance for 2015: On August 13, 2015, Christopher & Banks released its preliminary results for the second quarter. Christopher & Banks revealed that it expected to report net sales of approximately $94 million, which was below its previous guidance of between $100 million and $103 million, which was just a single-digit percentage downward revision. As such, the company said that it didn't expect to meet its full-year forecasts. Analysts had estimated $102.3 million on average.

2) Exit from S&P SmallCap 600 : The second hit came in mid-September 2015 when S&P announced that SPX FLOW Inc. (NYSE:FLOW) would replace Christopher & Banks in the S&P 600 after the close of trading on Friday, September 25. Also, S&P stated CBK "is ranked near the bottom of the S&P SmallCap 600 and is no longer appropriate for that index." As such, several index funds had to rebalance and adjust their positions accordingly. By saying index funds, I am talking about funds that comply with specific rules of construction regardless of market conditions. On that front, companies are purchased and held within the index fund when they meet the specific index rules or parameters and are sold when they move outside of those rules or parameters.

Christopher & Banks Has Outperformed Its Peers And The Retail Sector Lately

Since Q3 2015, many retailers have disappointed their shareholders and have seen their stocks drop significantly, such as Macy's , Nordstrom (NYSE:JWN), Men's Wearhouse (MW) which is now Tailored Brands (NYSE:TLRD), Aeropostale Inc. (NYSE:ARO), G-III Apparel Group (NASDAQ:GIII), Ralph Lauren (NYSE:RL) and Sequential Brands Group Inc. (NASDAQ:SQBG), to name a few. And many other have had a flattish performance thus far, such as Urban Outfitters Inc. (NASDAQ:URBN), Gap (NYSE:GPS), Guess? (NYSE:GES), Buckle Inc. (NYSE:BKE) and American Eagle Outfitters (NYSE:AEO).

A bunch of them, including Macy's and Nordstrom, have been blaming their poor business on the weather. Truth is that the mild winter didn't help the retail industry and many shoppers didn't go out for winter clothes shopping. But this isn't the key reason why investors have lost a significant amount of money from the vast majority of the retailers since Q3 2015.

The key reasons behind this ugly or flattish performance are the fierce competition as well as shifting consumer patterns, particularly among the millennial generation.

Given that a picture is worth a thousand words, this is the SPDR S&P Retail ETF (NYSEARCA:XRT):

and this is the Consumer Discretionary Select Sector SPDR ETF (NYSEARCA:XLY):

And this is the company's performance since late September 2015 when I recommended the subscribers to my Premium Research load it at $1.28/share:

Obviously, the company's stock has rallied more than 100% over the last six months proving the fundamental investors right and the inexperienced ones absolutely wrong. And now, the next question is: Is Christopher & Banks still irrationally cheap in either absolute or relative terms? Is there any upside left?

Christopher & Banks Is In A Transition Period In A Niche Market

As of March 2016, the company operates 514 stores consisting of 314 Missy-Petite-Women (MPW) stores, 77 Outlet stores, 65 Christopher & Banks stores and 58 stores in its women's plus size clothing division CJ Banks. Also, it operates an eCommerce website where the customers can find an expanded assortment of sizes, lengths and colors.

For reference, and as of October 2015, it operated 535 stores consisting of 314 MPW stores, 70 Outlet stores, 80 Christopher & Banks stores and 71 stores in its women's plus size clothing division CJ Banks.

That said, the message is clear. The company is in a transition period by opening new Outlet stores, closing some of its Christopher & Banks (CB stores) and C.J. Banks stores (CJ stores) while also converting the remaining ones into MPW stores that have higher sales per square foot, higher gross margin and higher operating margin than standalone CB and CJ stores.

The key here is that this retailer has a niche market targeting primarily professional women between 45 and 60 years old, who are looking for a fresh and colorful mix of classic clothing in quality products and accessories at a great value, as illustrated below:

The company has also been embracing the plus-size trend by owning a plus-size clothing division. Plus size for women is generally considered size 14 and up. This is a niche market with huge potential and limited competition to date coming primarily from Lane Bryant and Catherine's, both owned by Ascena Retail Group (NASDAQ:ASNA), Cato Corporation (NYSE:CATO), Chico's FAS (NYSE:CHS), Target's (NYSE:TGT) AVA & VIV and a few online players such as Eloquii, ModCloth and subscription-based Gwynnie Bee.

Specifically, the plus-size apparel market generated $17.5 billion in sales between May 2013 and April 2014, up 5% from the year prior, according to market research firm The NPD Group. According also to market research by online retailer ModCloth, 77% of plus-size women say it is difficult to find well-fitting garments, 73% say sizing is inconsistent across brands and 81% say they would spend more on clothing if they had more options in their size.

Christopher & Banks Won't Visit The Banks Remaining Debt-Free In 2016

The company has been in a transition period over the last twelve months, and therefore, it's not surprising that it burned cash of approximately $16 million in 2015, while its net sales fell short of analysts' expectations. Actually, annual net sales declined almost 9% and totaled $383.8 million, while operating loss in 2015 hit $11.3 million, compared to operating income of $9.4 million in 2014.

Also, comparable sales decreased 8.3%, compared to $418.6 million in 2014. However, the SSS figure is misleading and inaccurate. First, this metric includes only remaining stores that haven't been converted to the MPW concept yet and therefore, doesn't...


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