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|Subject: Christopher Banks CBK||Date: 8/7/2004 5:24 PM|
|Author: TMFKitKat||Number: 848 of 1264|
Christopher & Banks Corporation is a Minneapolis-based retailer of women's specialty apparel. They operate 556 stores in 42 states including 426 Christopher & Banks stores and 130 C.J. Banks stores. The company's Christopher & Banks stores sell exclusively designed, coordinated assortments of sportswear, sweaters and casual dresses in sizes four to 16. The company's C.J. Banks stores offer similar assortments of women's specialty apparel in sizes 14W and up. Christopher & Banks' target customer is a 40 to 60 year old working woman with an annual family income of $50,000 and above. Management believes this target customer leads a busy life, shops in regional malls and purchases fashions which are suitable for both work and leisure activities. In 2004, lines of merchandise included three principal categories: sportswear, sweaters and dresses. Plans are to reduce the amount of dresses sold in its stores in fiscal 2005. Selling space previously allocated to dresses will be shifted to other merchandise categories.
I have seen one of their mall locations. They attempt to attract mall traffic through appealing visual presentation. Christopher & Banks carefully designs front-of-store displays to draw customers into its stores. The window showed a neatly dressed mannequin in a pastel coordinated sweater/pants outfit. A look through the window also showed rack upon rack of soft pastel yellows, pinks and greens. This was about 18 mos. ago, right before they started their decline. If you were not a fan of neat matronly pastel, you had no reason to go into the store. It was bland. The visual program emphasizes attractive window displays focusing attention on current merchandise styles and a brightly lit, open store entrance area. To keep its fashions fresh, Christopher & Banks introduces six different color stories each year. Merchandise from each color story is featured in the Company's stores for approximately 12 to 16 weeks. Each color story has a two to four week build-up period in the back of the store. The color story is then featured in the front of the store for approximately eight weeks. Remaining merchandise from the color story is then moved to the back of the store for a two to four week liquidation phase. This is a strategy that is failing to work now. Same store sales have taken a plunge. Very different story from the breathtaking rapid rise that started in the mid 90's.
CBK directly imports approximately 96% of its total merchandise purchases. They anticipate that direct imports, as a percent of total purchases, will be approximately the same in fiscal 2005. Direct importing allows Christopher & Banks to obtain high quality merchandise at a lower cost and keeps them competitive with all the other retailers that get clothing from emerging nations. They have their own private label brands to help distinguish them from the rest of the pack. They anticipates private brand clothing will account for substantially all of sales again in fiscal 2005.
During the fiscal year ended February 28, 2004 CBK opened 68 Christopher & Banks stores and 29 C.J. Banks stores. The Company closed one store during fiscal 2004. They plan to open approximately 100 new stores in fiscal 2005 and 115 to 120 new stores in fiscal 2006.
Stores are located primarily in regional shopping malls in mid-sized cities and suburban areas, which offer high-traffic by potential walk-in customers. Approximately 85% of the stores are located in enclosed regional malls that typically have numerous specialty stores and two or more general merchandise chains or department stores. The average store size is approximately 3,425 square feet--approximately 85% is selling space. All of the stores are leased. Lease terms typically include a rental period of ten years and may contain a renewal option. Leases generally require payments of fixed minimum rent and contingent percentage rent, typically calculated at five percent of sales in excess of a specified level.
Some financial news
In July 2003, a 3-for-2 stock split took place. They split 3-for-2 on four more occasions: December 14, 1999, July 11, 2000, February 12, 2001 and December 12, 2001. Share and per share data have been restated to reflect the effect of the stock splits.
In September 2003, the first cash dividend was declared. They pay an on-going cash dividend of $0.04 per share paid quarterly, subject to Board approval. Quarterly dividends were paid on October 6, 2003, January 6, 2004 and April 6, 2004 .
The Board of Directors authorized a stock repurchase program in February 2003, enabling the CBK to purchase up to $20 million of its common stock, subject to market conditions. During February and March 2003, they purchased a total of 1,608,000 shares for a total cost of approximately $17.3 million. This stock repurchase authorization expired in February 2004.
As of April 30, 2004, under a new authorization, CBK has purchased a total of 294,000 shares of its common stock for a total cost, including commissions, of approximately $4.9 million, leaving $20.1 million available under the current authorization.
Ratios for the income statement
*growth in revenue is slowing significantly. The only reason for any increase was new store openings.
* All margins are declining. Since cost of sales includes markdowns and because same store sales are declining, this may be affecting gross margins.
*Cost of sales include the cost of merchandise, markdowns, shrink, freight in to and out from the Company's distribution center, buyer and distribution center salaries, buyer travel, rent and other occupancy related costs, miscellaneous merchandise expenses
*Net sales for t 2004 were $390.7 million, an increase of $51.9 million or 15.3%, from net sales of $338.8 million for 2003. The increase in net sales was attributable to an increase in the number of stores operated by the Company during the year, partially offset by a 2% decline in same-store sales. The 2% decline in same-store sales was primarily due to a challenging retail environment, as well as weakness in the Company's sweater business, particularly in the fourth quarter.
*For the year,stores opened in fiscal 2001, 2002 and 2003 generated flat same-store sales, while the Company's mature base of stores, opened in fiscal 2000 and earlier, recorded a 4% decline in same-store sales. Other retailers were not finding the environment as challenging(Chicos, the Gap) and that suggests CBKs inventory is not competitive.
* The decline in gross profit as a percent of net sales was mainly the result of approximately 170 basis points of negative leveraging of store rent expense. The negative leveraging of store rent expense resulted from a 2% decline in same-store sales combined with operating more stores in fiscal 2004 which were still in the buildup phase of their sales curve. In addition, improved pricing obtained from suppliers was substantially offset by increased markdowns expense resulting from the heavily promotional retail environment. The increased use of markdowns appears to be a factor in declining margins. Older stores were not extracting full value from square footage for the rent paid. Margins suffered.
*Even though the company is debt free, they pay interest expense on a credit facility. Loans under the Wells Fargo Revolver bear interest at Wells Fargo's base rate, 4.0% as of April 30, 2004, plus 0.25%. Interest is payable monthly in arrears. The Wells Fargo Revolver carries a facility fee of 0.25% based on the unused portion as defined in the agreement. Facility fees totaled $2,555 in fiscal 2004.
Balance sheet ratios
*Accounts receivables increasing--a very small account of $3 million
*Inventory not turning as rapidly. The last two years, inventory is increasing at rates exceeding growth in revenue. Is it just not appealing to the consumer?
*Still have remarkable ROE,ROA and ROIC in spite of the slow down
*Shares increasing in spite of buybacks. Options are a little on the high side.
*$2 cash per share makes the $14 price per share not quite as painful. They warn the cash will be used up pre-Christmas and then accrue post Christmas.
Ratios for the cash flow statement
*Operating cash flow positive and increasing
*Capex easily covered by operating cash