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Jason Mercer

DBRN AT A GLANCE

P/E ► 15.5 AVG EV/EBITDA ► 8.39 AVG ROA ► 6.9% AVG ROE ► 11.8% AVG Debt to Equity ► 0.808 AVG Current Ratio ► 1.57 LOW Interest Coverage Ratio ► 23.2 AVG

 

 

 

 

 

 

Dress Barn (Nasdaq: DBRN) sells clothing to women between the ages of 17 to 55, and hopes to grow with the expanding plus-size market; both company brands (Dress Barn and Maurices) have plus-size divisions to cater to the 65 million obese women in the United States.^[1] As a middle-class retailer, Dress Barn has suffered from worries about the recession; consumers are spending less and are more sensitive to prices. In response, Dress Barn has been cutting prices, which has helped maintain share but has led to lower net sales. Although neither Dress Barn nor Maurices have stores outside the United States, developments in other countries still affect them. For example, manufacturing costs in China have also risen, due in part to an 80% wage increase over the past year.^[2] This increase means higher costs for the company's goods, and thinner margins. Dress Barn has responded by establishing contracts with manufacturers in regions such as Africa and the Middle East, decreasing the influence Chinese manufacturing costs have on its bottom line.

Business and Financials

Dress Barn is divided into three main parts: Dress Barn, Dress Barn Woman, and Maurices.

• Dress Barn sells clothing to women between 35 and 55 years of age. The company produces its own apparel and its stores are located mainly in strip malls or near suburban areas. The company has ended its menswear and children's wear divisions this past year and instead decided to focus exclusively on its core demographic. Dress Barn Woman is the plus-size division of Dress Barn.^[3] Dress Barn also has a petite division, which sells smaller sizes of its merchandise.^[4]
• Maurices produces and sells clothing to a much younger consumer-17 to 34 year old women-under two labels: Maurices and Studio Y. Maurices provides casual and work clothing and accessories (such as jeans, pants, tops and handbags), while Studio Y offers more formal apparel such as dresses. Maurices stores are usually located in small markets with populations between 25,000 and 100,000.^[5]

^[6] Note: The Dress Barn, Inc.'s fiscal year ends in July.^[7]

Maurices' net income for this past quarter was $20.8 million (15.3% of sales) compared to $15.4 million (12.9% of sales) during the same quarter the previous year.^[8] Maurices' success is attributable to its expansion into plus sizes(it first entered the plus size market last June)^[9], its location in smaller markets and tight control of inventory. Dress Barn's net income, on the other hand, has decreased. It's operating income for this past quarter was $15.5 million (7.1% of sales) versus last year's $20.4 million (8.9% of sales).^[10] Dress Barn's customers have decreased their spending in the past few quarters in response to the weak United States economy and have also demonstrated an increased desire to find goods on sale. Dress Barn has been making numerous discounts on its products in order to encourage spending and keep its inventories from building up.^[11]

As the above chart indicates, strip malls are the preferred location for Dress Barn and Maurices stores. Maurices, especially, are located in smaller markets near large department stores. Smaller markets means there are fewer consumers, however that also means fewer other stores and less competition. Maurices also relies on the traffic generated by larger stores to draw consumers into its own.

Number of Stores Owned by Each Dress Barn Brand

The number of Dress Barn and Dress Barn Woman stores has decreased in the past few years, due in part to the company's decision to stop producing menswear and a few leases it had simply let expire. The number of Maurices stores has increased, which reflects its recent increases in sales.

Key Trends and Forces

Attempts to Encourage Spending Drives Prices Even Lower

Consumer confidence has decreased since recessionary fears surfaced at the end of 2007, and Dress Barn is one of many retail companies that have been affected-the past two financial quarters have seen a decrease in Dress Barn store sales: the 2nd quarter saw a 7% drop in sales and the 3rd quarter saw a 3% drop in store sales.^[14] In an attempt to reverse this trend and sell more products, Dress Barn has made numerous discounts on its products in order to prevent inventory from staying on the shelves for months.^[15] However, these discounts also decrease its net income. Given the fact that there are currently no signs that this trend will reverse by the end of the year, it will become even harder for Dress Barn to maintain positive net income.

Expanding Plus-Size Market Means Larger Market for Dress Barn

^[16]

This is a picture showing obesity trends in the United States from 1991 to 2003. It is evident that obesity rates in America have increased in the last decade, meaning the plus-size market has also grown to accommodate America's growing waistline. ^[17] The plus size market includes an estimated 65 million women, many of which are teenagers--half of American women wear a size 14 or larger. Dress Barn Woman and Maurices, which cater to plus-size women, are in a good position to exploit this $30 billion market segment.^[18]

Rising Manufacturing Prices Eats into Dress Barn's Revenues

Dress Barn, like many other apparel retailers, sources its goods from Asian factories. Manufacturing prices in China are increasing due to rising energy and raw materials costs. In addition, average wages have risen by 80% over the last year.^[19] This means Dress Barn will have to pay more for goods manufactured in China. Dress Barn has taken some preemptive action and has established contracts with factories in other countries (such as Africa and the Middle East)^[20] and decreased the number of contracts it holds with manufacturers in China.

Competition

Major Competitors

Dress Barn revenue is slightly above that of J.C. Penney and much lower than those of Kohl's and Sears. Kohl's and Sears sell many more products than just women's clothing, explaining the higher revenues. Of these four companies, Dress Barn is the only one that does not sell merchandise online--it has websites for Maurices and Dress Barn, but they are used mainly to disseminate information about their products.

J.C. Penney is a department store chain that sells women's, men's and children's apparel, along with home decorations and electronics.

Kohl's is the 23rd largest retailer in the United States, selling apparel and home furnishings to moderate-income families through its stores as well as its website.

Sears Holdings is the fourth largest retailer in the United States, operating 3,791 stores under the names Sears and Kmart.

References

1. ↑ Dress Barn Archived Charts-Hoover's Report.
2. ↑ "China's Inflation Hits American Price Tags." The New York Times. February 1, 2008.
3. ↑ DBRN 2007 10-K. Item 1, Page 3.
4. ↑ The Dress Barn, Inc. Profile. Market Watch.
5. ↑ DBRN 2007 10-K. Item 1, Page 3.
6. ↑ DBRN 2007 10-K. Item 1, Page 14.
7. ↑ Dress Barn Key Numbers-Hoover's.
8. ↑ Dress Barn, Inc. F3Q08 Earnings Call Transcript, Seeking Alpha.
9. ↑ Dress Barn, Inc. F3Q08 (Qtr End 04/26/08) Earnings Call Transcript. Seeking Alpha
10. ↑ Dress Barn, Inc. F3Q08 Earnings Call Transcript, Seeking Alpha.
11. ↑ Dress Barn F2Q08 (Qtr End 01/26/08) Earnings Call Transcript. Seeking Alpha.
12. ↑ DBRN 2007 10-K. Item 1, Page 4.
13. ↑ Dress Barn Archived Charts-Hoover's Report.
14. ↑ Dress Barn, Inc. F3Q08 Earnings Call Transcript, Seeking Alpha.
15. ↑ Dress Barn, Inc. F3Q08 Earnings Call Transcript, Seeking Alpha.
16. ↑ Obesity Trends-Obesity in America.
17. ↑ Dress Barn Archived Charts-Hoover's Report.
18. ↑ Dress Barn Archived Charts-Hoover's Report.
19. ↑ "China's Inflation Hits American Price Tags." The New York Times. February 1, 2008.
20. ↑ DBRN 2007 10-K. Section 1, Page 6.
21. ↑ JSS 2007 10-K. Item 6, Page 11.
22. ↑ JSS 2007 10-K. Item 6, Page 12.
23. ↑ DBRN 2007 10-K. Item 6, Page 14.
24. ↑ DBRN 2007 10-K. Item 1, Page 4.
25. ↑ KSS 2007 10-K. Item 6, Page 16.
26. ↑ KSS 2007 10-K. Item 1, Page 5.
27. ↑ SHLD 2007 10-K. Item 6, Page 19.
28. ↑ SHLD 2007 10-K. Item 6, Page 19.