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Published: March 12, 2010
The weak economy has brought a silver
lining: companies that were inefficiently operating were forced
to take a hard look at their operations and address any
shortcomings. And Christopher & Banks (NYSE: CBK) sure
had many problems to tackle. The women’s clothing retailer did a
poor job of managing store inventories, whether it was sending
too many winter clothes to Florida stores, or poorly stocking
dresses in the appropriate sizes. Moreover, the retailer didn’t
bother testing new product lines before rolling them out to
stores, so heavy markdowns to clear unsold goods became the
norm.
That kind of sloppy management is acceptable in a solid economy:
Christopher & Banks usually generated a respectable $40 to $60
million in annual net income throughout much of the last decade.
The retailer has always had a solid reputation for conservative
fashions for Baby Boomer women. But as the economy shrank, so
did the company’s sales and profits. As Christopher & Banks'
fortunes started to decline, the Board installed a new CEO,
Lorna Nagler, in August, 2007. Her plans to turn the retailer
around were masked by a further slowing of the economy. But with
the economy on the mend, the fruits of her labors are starting
to show.
The
turnaround plan relied on tried-and-true methods in the
retail industry: A $15 million investment in technology now
allows the company’s fashion buyers to better plan and allocate
each season’s offerings, incorporating timely feedback on which
fashions are testing well with focus groups. Christopher & Banks
now much more accurately targets its list of six million
potential customers with promotions and events that have already
started to boost store traffic.
Yet the real key is to figure out how to boost sales volume at
each store. The retailer has always operated a second store
chain called C.J. Banks that caters to plus-size women. Now,
many of the plus-size offerings are being featured in a
store-within-a-store concept in some of the core Christopher
Banks’ stores, leveraging on that brand's larger 500 store base.
In addition, management is now trying new concepts such as
jewelry and scarves, and early results from that trial are
yielding higher sales volumes and improved store-level profit
margins.
Of course, these efforts have all come during a period of
lousy retail sales. Same store sales fell -12% in fiscal 2009
and a whopping -23% in the first half of fiscal 2010. Sales fell
at a slower pace in the fiscal third quarter ending November
2009, and are expected to turn positive in the first quarter of
fiscal 2011 that began March 1. All told, annual sales will have
likely dropped from $576 million in fiscal 2008 to about $450
million in fiscal 2009.
Notably, management has also trimmed about $20 million in
operating expenses, even as it made the above-cited new
investments, so the retailer should actually turn a decent
profit even as sales remain weak. Yet in coming years, as sales
start to modestly rebound, profit margins should expand at a
rapid clip. Sterne Agee’s Margaret Whitfield thinks per share
profits should rise from around $0.09 this fiscal year to $0.32
next year. And that assumes sales will grow only +3% to +4%. If
sales grow at a similar pace to around $510 million the
following year (which would still be well below the $576 million
generated in fiscal 2008), per share profits could approach the
$0.60 mark.
For some investors, a price/sales gauge may be easier to track,
since profits will likely remain subpar in the coming quarters.
Shares still trade for about 0.80 times sales, handily below the
1.10 average of the past five years. Just to get back to that
historical level, shares could rise to around $11, a gain of
about +37.5%. And if Nagler’s efforts gain real traction, shares
may start to make a move a good deal higher. This stock fetched
$30 just three to four years ago. Investors would be pleased to
see shares rise to just half of that former peak.
-- David Sterman
Contributor
StreetAuthority |
