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Shawn Woodhull

TWB AT A GLANCE

P/E ► -10.9   EV/EBITDA ► 36.0 HIGH ROA ► -1.3% AVG ROE ► -10.4% AVG Debt to Equity ► 2.08 HIGH Current Ratio ► 2.30 AVG Interest Coverage Ratio ► -1.78 AVG

 

 

 

 

 

 

Tween Brands (NYSE: TWB) operates retail stores that sell clothing to "tweens", girls between the ages of 7 and 14. TWB's stores sell clothing, jewelry, backpacks, purses, and other accessories.^[1] The Limited Too was TWB's first chain, with 586 stores open in the U.S. at the end of the first quarter of 2008, and it is aimed at an older, fashion-conscious group that will pay more for clothes than the younger girls that shop at Justice.^[2] Justice was launched in 2004, operating 281 stores at the end of Q1 FY08.^[3]

Tween Brands' sales have nearly doubled between the end of 2003 ($598 million) and 2007 ($1.0 billion) due to the launch and growth of the Justice brand. Same store sales grew 4% company-wide in 2007, but this was fueled by 21% growth at Justice stores while sales at The Limited Too remained flat (0% growth).^[4] The company announced in August '08 that in response to slumping sales at these stores, it will discontinue the Limited Too brand, converting 560 stores to the Justice brand and closing 26 others.^[5]

Despite nearly doubling its total revenue from $599 million in 2003 to $1.0 billion in 2007, Tween Brands remains a smaller player in the specialty youth apparel retail market.^[6] The company must continue growing to match the performance of competitors like Abercrombie & Fitch ($3.75 billion of sales in 2007), American Eagle ($3.0 billion), and Aeropostale ($1.6 billion).^[7][8][9]

Business Overview

Limited Too was launched as an in-store department of The Limited, a subsidiary of Limited Brands. Limited Too later grew into its own retail store chain, then in 1999 Tween Brands was spun-off from Limited Brands (LTD). In early calendar-year 2004 (end of FY03), Tween Brands launched Justice, ending FY04 with 35 Justice stores operating in the United States.^[10] Both stores have grown significantly since launch, as TWB operated 586 Limited Too and 281 Justice stores at the end of the first quarter of FY08, as well as 26 Limited Too locations in the Middle East through a licensing agreement with Alshaya Trading Co. and 1 Limited Too Store in Sweden through a licensing agreement with Family Invest AB.^[11]

Each of Tween Brands' stores target girls aged 7 to 14 with a wide range of apparel and other merchandise, including jewelry, cosmetics, footwear, electronics, music, games, toys (including fad-item Webkinz stuffed animals) and other accessories. Limited Too and Justice only sell their own respective private label apparel, but some of the accessories sold in TWB's stores are sourced from branded manufacturers. While Limited Too and Justice each cater to the tween market, Limited Too's merchandise is higher priced (Limited Too's most expensive jean is priced at $54.50 compared to Justice's most expensive pair at $36.50) and geared for a slightly older portion of the tween market than Justice's assortment.^[12][13]

In 2007, Tween Brands received a total of $1.01 billion in sales between the two apparel store chains, a 14.7% increase from revenue in 2006.^[14] TWB's total revenue has increased more than 12% annually since 2004, with net sales nearly doubling from $599 million in 2003 to $1.0 billion in 2007.^[15] TWB earned a 36.4% gross margin and 8.3% operating margin on its $1.0 billion of revenue in 2007.^[16] TWB's operating margin fell over 2 percentage points in 2007 (from 10.8% in 2006 to 8.3% in 2007), party because operating income fell due to $4.4 million of restructuring expenses related to cost saving initiatives.^[17]

Tween Brands' net sales have grown more than 12% annually since 2004.^[18]

Trends and Forces

International Expansion in Middle East and Europe

In 2004, Tween Brands became an international retailer by partnering with Alshaya Trading Co. to open Limited Too stores in the Middle East. At the end of the first quarter of 2008, Tween Brands and Alshaya Trading Co. operated 26 Limited Too stores throughout Kuwait, United Arab Emirates, Jordan, Qatar, and the Kingdom of Saudi Arabia, after opening 1 store during the first quarter in Saudi Arabia.^[19] During the first quarter of 2008, TWB partnered with Family Invest AB to open the first European Limited Too store in Stokholm, Sweden.^[20] Although sales from international locations were not large enough to materially impact TWB's total revenue, the Limited Too chain is reaching a saturation level in the U.S. and TWB has slowed down domestic store expansion (adding only 33 stores between 2003 and the end of Q1 FY08), so international expansion could become a major factor in TWB's long term growth opportunities.^[21][22]

Channeling Growth from E-commerce Operations

In addition to store locations, TWB operates an e-commerce store for the Limited Too brand, which drove a 92% increase in direct channel (e-commerce and catalog) sales for the brand in 2007.^[23] This growth continued in 2008 as e-commerce sales from Limited Too's website increased 75% in the first quarter of FY08.^[24] In order to capitalize on the growing importance of e-commerce Tween Brands launched an e-commerce operation for its Justice brand in the summer of 2008 for the fall season, in hopes of mirroring the success and popularity of the Limited Too online store which experienced a 35% increase in unique user visits in 2007.^[25] Similar tremendous growth in e-commerce sales can be observed at several other youth apparel retailers, such as Abercrombie & Fitch where direct-to-consumer (e-commerce and catalog) sales grew 49% in fiscal 2007 to $259 million (7% of total sales).^[26]

Second Half Strength: Back-to-School and Holiday Shopping

Due to the surge of shopping in the second half of the fiscal year created by the back-to-school and holiday seasons, Tween Brands' performance in the third and fourth quarters are incredibly important to the company's success. In 2007, the second half of the year accounted for 57% of total sales and 58% of total gross profit.^[27]

• Back-to-School: Because the overwhelming majority of the customers of TWB's stores age from 7 to 14 years old are students in elementary and middle schools, both Limited Too and Justice traditionally experience a significant boost in sales during the end of summer as students shop in preparation for school. The back-to-school shopping season also boosts sales for TWB's competitors such as Abercrombie & Fitch, American Eagle Outfitters and Aeropostale. Most of the back-to-school sales are included the third fiscal quarter, for which TWB experienced same store sales growth of 4% in 2007.^[28]

• Holiday Season: The retail industry typically sees a large boost in sales leading up to the holidays in November and December. Tween Brands is no different, as the company's fourth quarter sales were nearly $100 million greater than its first quarter sales in 2007.^[29] In 2007, TWB's same store sales grew 7% in the fourth quarter, reflecting a strong holiday season for Limited Too and Justice.^[30] A lackluster performance during the holiday season can lead to extensive promotional selling of leftover inventory which drags down TWB's already low margins.

Tween Brands received 57% and 58% of its annual sales and gross profit from the second half of the fiscal year in 2007.^[31]

Competition

Tween Brands is the largest specialty apparel retailer focusing on the tween demographic, with $1.0 billion in 2007 sales^[32]. However, it is the only major retailer that specifically and exclusively targets the "tween" market of 7 to 14 year old girls. Most of its competition comes from other youth apparel retailers who target teenagers or children with similarly fashioned apparel and merchandise. One of Tween Brands' most direct competitors are Abercrombie & Fitch Company (ANF) and American Eagle Outfitters (AEO). Tween Brands' most threatening competitor is another company that was spun-off from Limited Brands: Abercrombie & Fitch. Abercrombie is a major competitor for Tween Brands because although most of its revenue comes from its namesake and Hollister chains, ANF's children's store, abercrombie, targets a similar age group as TWB's stores. ANF received over $471 million in sales in 2007 from its 202 abercrombie stores, making the specialty children's store about half the size of Tween Brands.^[33] In addition to Abercrombie & Fitch Company (ANF), American Eagle's aerie sub-brand which is sold in AEO stores and 62 standalone aerie stores targets teenage girls who fall in the older end of Tween Brand's target market. Also, American Eagle Outfitters (AEO) will launch a children's brand, 77kids, online in the second-half of fiscal 2008 and in stores in 2010, which will directly compete with Limited Too and Justice.^[34] Also within the youth apparel specialty market, Tween Brands faces some competition from Aeropostale, which targets 14 to 17 year old girls and boys, placing it in the cusp of Tween Brands' target age range.

Beyond Abercrombie & Fitch Company (ANF), American Eagle Outfitters (AEO) and Aeropostale (ARO), Tween Brands competes with other retailers who offer apparel and accessories for young girls, such as Gap (GPS), through its GapKids and Old Navy stores.

References

1. ↑ Tween Brands (TWB) Annual Report 2007, Limited Too and Justice Retail Operations, pg. 24
2. ↑ Tween Brands (TWB) Press Release, First Quarter Sales and Earnings 2008
3. ↑ Tween Brands (TWB) Press Release, First Quarter Sales and Earnings 2008
4. ↑ Tween Brands (TWB) Annual Report 2007, Selected Financial Data, pg. 41
5. ↑ The Wall Street Journal, Tween Shifts to Lower Priced Strategy, 8/13/2008
6. ↑ Tween Brands (TWB) Annual Report 2007, Selected Financial Data, pg. 41
7. ↑ Abercrombie & Fitch 10-K 2007, pg. 25, Selected Financial Data
8. ↑ American Eagle Outfitters (AEO) 10-K 2007, Selected Financial Data, pg. 16
9. ↑ Aeropostale (ARO) 10-K 2007, Selected Financial Data, pg. 17
10. ↑ Tween Brands (TWB) Annual Report 2007, Our History, pg. 23
11. ↑ Tween Brands (TWB) Press Release, First Quarter Sales and Earnings 2008
12. ↑ Limited Too Online Store
13. ↑ Justice Online Store
14. ↑ Tween Brands (TWB) Annual Report 2007, Selected Financial Data, pg. 41
15. ↑ Tween Brands (TWB) Annual Report 2007, Selected Financial Data, pg. 41
16. ↑ Tween Brands (TWB) Annual Report 2007, Selected Financial Data, pg. 41
17. ↑ Tween Brands (TWB) Annual Report 2007, Financial Results, pg. 4
18. ↑ Tween Brands (TWB) Annual Report 2007, Selected Financial Data, pg. 41
19. ↑ Tween Brands (TWB) Press Release, First Quarter Sales and Earnings 2008
20. ↑ Tween Brands (TWB) Press Release, First Quarter Sales and Earnings 2008
21. ↑ Tween Brands (TWB) Press Release, First Quarter Sales and Earnings 2008
22. ↑ Tween Brands (TWB) Annual Report 2007, Selected Financial Data, pg. 41
23. ↑ Tween Brands (TWB) Annual Report 2007
24. ↑ Tween Brands (TWB) Press Release, First Quarter Sales and Earnings 2008
25. ↑ Tween Brands (TWB) Annual Report 2007, Growing Beyond Stores, pg. 8
26. ↑ Abercrombie & Fitch (ANF) Press Release, Fourth Quarter and Fiscal Year 2007 Results
27. ↑ Tween Brands (TWB) Annual Report 2007, Quarterly Financial Data, pg. 91
28. ↑ Tween Brands (TWB) Press Release, Third Quarter Earnings 2007
29. ↑ Tween Brands (TWB) Annual Report 2007, Quarterly Financial Data, pg. 91
30. ↑ Tween Brands (TWB) Press Release, Fourth Quarter Earnings Release 2007
31. ↑ Tween Brands (TWB) Annual Report 2007, Quarterly Financial Data, pg. 91
32. ↑ Tween Brands (TWB) Annual Report 2007, Selected Financial Data, pg. 41
33. ↑ Abercrombie & Fitch (ANF) Annual Report 2007, Financial Summary pg. 8-11
34. ↑ American Eagle Outfitters (AEO) Press Release, First Quarter 2008
35. ↑ Tween Brands (TWB) Annual Report 2007, Selected Financial Data, pg. 41
36. ↑ Abercrombie & Fitch (ANF) Press Release, Fourth Quarter Earnings Release
37. ↑ Aeropostale (ARO) Press Release, Fourth Quarter Earnings Release
38. ↑ American Eagle Outfitters (AEO) Press Release Report, Fourth Quarter Earnings Release
39. ↑ Gap (GPS) Press Release, Fourth Quarter Earnings Release