Thursday, May 21, 2009

The Missing Tween

The owner of the Justice and Limited Too brands that focuses on the tween girls category (7-14 year olds) has been crushed by the markets and the weak economy. Oddly though, Tween Brands (TWB) has been crushed much more by the markets then the likes of Childrens Place (PLCE), Gymboree (GYMB), and Pacsun (PSUN). Was it because of the the move to transition all of the Limited Too stores to the much better performing Justice brand? If so, the market was placing a huge execution discount on the stock.

All 4 stocks recently reported Q1 numbers through the end of April and clearly TWB and PSUN had the worst numbers and they consequently have the lowest market caps. Both GYMB and PLCE reported pretty decent numbers and hence they have the highest market caps. But thats where the market quits making sense. PSUN has a market cap nearly triple that of TWB - $275M vs $100M - even though TWB posted better results actually recording an operating profits versus the $8M loss at PSUN. With comparable sales, stores, and square feet, you'd expect a slightly higher valuation for TWB. Look for this to happen over the next few weeks has investors clue in that TWB is a survivor.

Now GYMB and PLCE are definitely solidly profitable and better off then TWB, but its hard to imagine that they are worth 10x that of TWB. GYMB has similar revenue, but my much higher profits owing partly to much lower square feet and hence costs. TWB has 3.8M to the 1.7M at GYMB. TWB did have higher volumes prior to the last year so they'll need to get the revenue back to justify theis much square footage. Some pruning of the base not help margins. PLCE on the other hand reported nearly double the revenue including higher numbers YOY, but not much more in income then GYMB. GYMB definitely has the margins down while PLCE makes thh profits off of volume. Either way, they are both performing much better then TWB.

Its very possible that TWB will see a snapback in revenue as the transition to Justice has very possibly hurt sales in the former mall based Limited Too locations. The off mall Justice locations are definitely attractive with the mall no longer the top destination for alot of people. On the recent Conference Call, management talked about the huge savings in Marketing expenses last quarter that will be ramped up now that the transition is basically complete. A return to growth could stock rocket this stock. Based on the competition, I'd have to estimate the valuation of this stock more correctly in the middle of these other stocks or roughly $500M or $20 per share.

Looking at Tween's prospects, they use to generate in the $2-3 range of earnings per share. They also forecast back in August that they would generate savings of $20-25M from the transition to Justice. This would put earnings closer to $4 assuming they don't lose customers that really just wanted the Limited Too concept. Even assuming they really get zero benefit from the transition they could just be back to $2.50 in earnings placing the stock back to the $30s. Now they also seem to have the opportunity to up margins from reducing the square footage.

No comments: