Bijou Brigitte BIJ GR W
October 29, 2007 - 11:03am EST by
dylex849
2007 2008
Price: 124.00 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 1,000 P/FCF
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT

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  • Retail
  • Insider Ownership
  • Dividend yield
  • Jewelry
  • Analyst Coverage
  • Underfollowed
  • Great management
 

Description

Quick -  name three successful mass market retailers who spend virtually zero money on advertising. 

 

Other than perhaps Costco, how many could you name?

 

I am now going to describe a highly successful international retailer who you have likely never heard of, but who has some of the most incredible economics you have ever seen in the retail industry.  To top it off the company is run by an experienced and profit focused management team, has 50%+ inside ownership, an exceptionally high dividend yield for a billion dollar plus market cap (~6%), great magic formula numbers (pretax return on capital of 100%+, pretax earnings yield of ~15.0%), and has a very long runway of growth ahead of it (10+ years).  Once you are finished reading the writeup you will also be able to name one successful retailer aside from Costco in response to the opening question.

 

Bijou Brigitte (BB) serves the mass market for fashion jewelry.   We think this is an attractive industry for the following reasons:

 

1.  Margin-rich (BB has averaged gross margins of ~85% for the past three years)

2.  Speed-to-market - ie. much shorter lead-times than apparel - can deliver the hottest fashion trends to market quickly

3.  Can cover down-trending businesses w/trending ones - companies that are not multi-faceted are challenged in this way ie. when denim is out-of-style or -season, Levis cannot make up the sales through other product categories.  Same goes for Hot Topic and goth, ANF for preppy.  Accessories retailers can react by simply shifting the composition of their businesses.

4.  Mass appeal which enable economies of scale for large players - less fashion-forward people can participate in the current trends, so product would be viable in the Midwest US or small town Europe, just as with people in NYC or LA (in contrast to skinny jeans which some of you may have noticed are less than flattering on the less than skinny portion of the population).

5.  Accessories are an easier sell for many reasons:
- people with smaller budgets can use accessories to update their wardrobes at minimal cost. 
- not as big of an investment as apparel, so less thought goes into the purchase. 
- if a customer has gained weight, clothes might be unflattering, but jewelry and handbags can still be fun to buy.

6.  Inventory is less of a challenge, one-size fits-all – accessory retailers do not have to buy as deep into each style.  Fewer skus per style and less inventory on-hand will help keep turn rate high.  Don’t have to worry about becoming broken in sizes like in apparel.  Apparel needs to own a minimum of a full size run, or else be forced into an early markdown (just to give you an idea of size range per style: kints - 5 sizes; wovens - 7 to 12 sizes; denim - up to 26 sizes).

 

7. Tried, tested and proven resiliency - one trend may go out of style, but others soon come in to take up the slack.  Whether it be pendants this year, bohemian necklances or Sarah Jessica Parker Sex in the City big gold hoop earrings, there is always some type of accessory that is in style.  Next time you go for lunch, look at the grandmother, mothers, daughters walking the streets…they are all wearing accessories of one type or another whether it be earring, bracelets, rings, or fashion watches.  It has always been this way, and given the dress-up habits of my 2 and 4 year old girls I suspect it won’t ever change.  This anecdotal and non value added comment is supported by the very resilient historical sss figures of Claire’s over the years, which lends evidence that a customer is more likely to stop buying $100 ANF jeans before they stop buying $5 trinkets. 

 

8.  If you are successful and establish yourself as a destination store, both BB and Claire’s have proven you don’t need to spend money on advertising to attract customers.  This is a big help to margins.

Advantages of large chains vs mom&pops:
1.  Bigger buys = lower costs
2.  Ability to transfer goods in which performance differs regionally

To address the obvious, this is also an industry that has low or virtually no barriers to entry.  However, we will offer up the clique that retail is a devil in the details business, particularly so for a dedicated accessories retailer for the following reasons:

 

1.  Very sku-intensive, meaning more work for the buying office to buy all the different styles, monitor performance, etc (BB has 9k SKUs)

2.  Presentation is a challenge - with all that merchandise, fixtures can quickly become very messy, and thus, visually unappealing.  Also, without mannequins to wardrobe, it takes a certain knack to put together attractive displays…more difficult to romance the merchandise via elaborate sales displays.

 

3.  IT can be rather tricky as one rolls out many stores due to complexity of sourcing and distribution given large number of sku’s.

 

All of the above challenges may be easily overcome for a small chain of 5,10 or perhaps even 50 stores, but to build up a business similar in size to that of Claire’s or BB strikes us logarithmically more challenging and time consuming.

 

Perhaps that is the reason Claire’s has been the only name of critical mass in the US for so long and was bought out at a fancy multiple (11x EBIT) by Apollo last year (worth noting Claire’s has a more developed store base and less growth opportunities than BB).  OK, maybe it was just because Apollo could just get a ton of cheap debt, but I digress.

 

The typical unit economics for BB are as follows:

 

Initial capex           E100k

Initial inventory     E50k

Initial investment   E150k

 

Avg store sales based on 2006 data   E400k

Approximate 4 wall EBIT margin        40%

 

ROI  - ~100%

Payback – ~1 year

 

These numbers are not exceptional to 2006.  In fact, the return on net assets for the organization for the last three years is as follows:

 

 

 

2003

2004

2005

2006

Sales

 

   164.9

   223.4

   301.6

   348.0

  % change

 

34.5%

35.5%

35.0%

15.4%

 

 

 

 

 

 

EBIT

 

     45.5

     73.8

   111.5

   121.5

  % margin

 

27.6%

33.0%

37.0%

34.9%

 

 

 

 

 

 

Avg Net Op Assets

 

 

     39.0

     53.2

     68.0

EBIT/Avg Net  OPAssets

 

189.2%

209.5%

178.7%

 

BB’s ~950 stores are currently represented in Germany, Netherlands, Austria, Spain, France, Italy, Greece, Hungary, Poland, Portugal and to a much lesser degree the US and UK.  Management has opened between 100-140 stores during each of the past 4 years. 

 

The company has been successful in every market it has entered.   The company recently opened 2 stores in the UK, a market management believes has potential for 400 stores.  On continental Europe management believes there is potential for another 1,000 stores.  In the US, where Claire’s operates circa 2,000 stores, BB opened its first 2 stores last year. 

 

After positive feedback in the US, management expects to accelerate the pace of the US expansion with an ultimate target of 1,000 stores down the road.  We would agree with management that the concept is proven, and echo management’s public statement that BB has “enormous expansion potential internationally” (Annual Press Conference Release, 2007).

 

In light of the vast opportunities for expansion, management is focused on maximizing the value of the model in a disciplined and measured fashion.  The team will open new stores as quickly as they can find suitable locations, but no quicker (think of Buffett and his desire that his insurance companies don’t write policies just for the sake of writing policies).  If management can’t find attractive locations they will scale back the opening schedule so as not to compromise the economics of the business model.  For 2007 they have guided to a slower than historical pace of 80 net openings.  Perhaps next year will be more, perhaps it will be less, perhaps the same.  Ditto for 2009, 2010, 2011, etc.  Management cannot tell you with certainty how many stores will be opened each year, but they have built up the people and infrastructure to handle 150 per year.

 

Not surprisingly given management’s focus on the long-term, there is no coverage by any global brokers, and the name can largely be considered below the radar if you talk with European retail analysts.  This is in stark contrast with the public perception of BB among its addressable market, whom regard the retailer as top of mind for the purchase of fashion jewelry.  Think a sophisticated and well presented Claire’s (without the Dora the Explorer earrings), but catering to an older and more sophisticated customer.

 

With such a long-term outlook management has little concern for whether like for like sales are +3% or -3% in any given year.  Unfortunately for the momo investors, after three years of double digit lfl’s, the wheels fell off in 2006 with negative 2% lfl’s.  To add insult to injury the company had the audacity to further report negative lfl’s of 3.2% in the first quarter of 2007 and negative 3.6% in Q2 2007.  We suspect 5 years from now very few people will be talking about or even remember what 2007 or 2008 lfl’s were, but time will tell.  

 

Rightly or wrongly we have made a bet the current level of sales per box is more or less sustainable, and that is core to the investment thesis.  As a data point Claire’s Europe averaged sales per square foot of USD791, USD862, USD892 in 2003, 2004, 2005 respectively.  Based on some rough estimates and discussions with management (sales/sqft are not formally disclosed), we believe BB is running at levels a little below those of Claire’s (our estimate is about USD800/sqft in 2006).  Management believes sales/sqft are sustainable, and if anything will go up over time rather than down. 

 

We believe the current share price reflects expectations of negative lfl’s (similarly sales per sqft declines) for the remainder of this year as well as the next two years.  If that is the case the stock is probably fairly valued at present.  If management manages to start generating positive lfl’s at any point in the next few years we think the stock is too cheap. 

 

Some may find it worth nothing that this exceptionally conservative management team noted in the second quarter press release that “Although the negative sales trend was still clear in April, business development has been positive since June, so that a better result can be expected in the third quarter”.  This business has notoriously little visibility, but from our research we have found nothing to suggest the business is suddenly broken.  Competition has steepened over the past few years as more and more department stores and apparel retailers have begun to realize the attractiveness of the accessories market, but we don’t see the limited offerings of general merchants permanently displacing a specialist retailer such as BB.

 

The key risk as we see it is that further expansion by chains such as Claire’s and European competitors (e.g. Six, Accessorize) saturate the market leading to lower sales per box for all players.  From our research we believe BB skews towards older customers than Six or Claires such that in general terms it is more likely for BB to capture the occasional core customer from these chains than vice versa.  Big picture the easiest way to describe this is that a 30 year old woman is less likely to shop at Claire’s than a 13 year old is likely to shop at BB.  This viewpoint is somewhat reaffirmed by Claire’s use of Icing by Claire’s (often in the same mall as a regular Claire’s store) that targets the slightly older and more sophisticated customer.  Lastly, we speculate that it will be the smaller chains or independents that feel the most pressure in a more competitive  market, leading to ultimate closure of some of the more peripheral players.

 

As for the actual managers in question, the company is family run. The father was the original founder, the son the current CEO.  We have had telephone discussions or in person visits with the founder, the son, and the CFO (who is not a blood relation but given the similarities in philosophies one could easily be mistaken otherwise).  Each key individual “gets it”.  The company has not produced the margins and ROC they have by accident.  They have built the organization (IT, infrastructure, human resources) with the intent of delivering sustainable returns for the long haul.  Management owns 50+% and have told us explicitly they will never sell a single share.  Compensation is very reasonable, options nonexistent. The CEO (son) has told us “This is the last job I will hold until I die” and is managing the business with that in mind.

 

As for commitment to shareholders, we suggest you look at past dividends as data points.  The company has historically had a high dividend payout ratio via a combination of regular and special dividends.  Management has told us explicitly the dividend is going up and not down.  Management has told us explicitly they have absolutely no intention of becoming a bank (e.g. hoarding cash).  If the company EBIT develops as we believe, the company will have no choice but to ramp up the dividend such that it is not inconceivable that in 2009 the shares will be yielding ~7%+.  That being said, we expect next year’s dividend to be E7.00-7.50/share, which implies a current yield of ~5.5-6%.

 

Before presenting the current EV, I will ask you take a moment to be intellectually honest and ask yourself what you would pay for a business with the previously described economics, long runway to open additional high ROIC stores, run by a management team that is looking to add value with every cent they spend.

 

The current EV breaks down as follows:

Share price       E124

S/O                  8.1m

Mkt cap           E1,000m

Cash                E156m (end of Q2 2007)

EV                   E850m

 

Since 2006 was the last full fiscal year, I present the current valuation based on 2006 actuals:

 

EV/EBITDA                                        6.3x

EV/EBIT                                              6.5x

EV/FCF excluding growth capex          11.3x

EV/FCF including growth capex           13.5x

 

We do have an internal model, but to make thinks easy let’s just assume we have flattish earnings expectation for 2007/2008 vs 2006.  As a data point, 1H 2007 net income was E33.4m, down from E34.3m in 1H 2006.  2007 results have been negatively impacted by an increase in German VAT (up to 19% from 16%), while looking forward 2008 will benefit from a reduction in the corporate tax rate in Germany.

 

We believe the prior multiples suggest good value, as does the dividend yield.  At these prices one could optically argue you are paying around 10x for forward looking FCF excluding growth capex, which suggests you are getting future growth for free provided the runrate in earnings from the present store base is sustainable.

 

The downside of the name is that like many retailers the visibility on quarterly revenue is limited at best. To preserve margins at the current level our model suggest you need 2-3% positive lfl’s, which coincidentally was the same figure quoted by Claire’s management on their recent conference call for bondholders.  

 

On the upside, the financials could not be cleaner, management is completely transparent when you speak with them, they are very gracious hosts if you take the time to visit, and they are truly committed to sharing the rewards of success with shareholders by increasing the dividend. 

 

Overall it strikes us that there are minimal expectations in the current price and one may be pleasantly surprised at some point over the next year or two.  If things just muddle on with +-2% lfl’s you still have a high single digit FCF yield even after deducting for growth capex.  For an unlevered stock with a decent dividend yield and a billion dollar plus market cap, that strikes us a reasonable risk/reward situation.

Catalyst

Nothing immediate, perhaps return to positive LFLs down the road
    sort by    

    Description

    Quick -  name three successful mass market retailers who spend virtually zero money on advertising. 

     

    Other than perhaps Costco, how many could you name?

     

    I am now going to describe a highly successful international retailer who you have likely never heard of, but who has some of the most incredible economics you have ever seen in the retail industry.  To top it off the company is run by an experienced and profit focused management team, has 50%+ inside ownership, an exceptionally high dividend yield for a billion dollar plus market cap (~6%), great magic formula numbers (pretax return on capital of 100%+, pretax earnings yield of ~15.0%), and has a very long runway of growth ahead of it (10+ years).  Once you are finished reading the writeup you will also be able to name one successful retailer aside from Costco in response to the opening question.

     

    Bijou Brigitte (BB) serves the mass market for fashion jewelry.   We think this is an attractive industry for the following reasons:

     

    1.  Margin-rich (BB has averaged gross margins of ~85% for the past three years)

    2.  Speed-to-market - ie. much shorter lead-times than apparel - can deliver the hottest fashion trends to market quickly

    3.  Can cover down-trending businesses w/trending ones - companies that are not multi-faceted are challenged in this way ie. when denim is out-of-style or -season, Levis cannot make up the sales through other product categories.  Same goes for Hot Topic and goth, ANF for preppy.  Accessories retailers can react by simply shifting the composition of their businesses.

    4.  Mass appeal which enable economies of scale for large players - less fashion-forward people can participate in the current trends, so product would be viable in the Midwest US or small town Europe, just as with people in NYC or LA (in contrast to skinny jeans which some of you may have noticed are less than flattering on the less than skinny portion of the population).

    5.  Accessories are an easier sell for many reasons:
    - people with smaller budgets can use accessories to update their wardrobes at minimal cost. 
    - not as big of an investment as apparel, so less thought goes into the purchase. 
    - if a customer has gained weight, clothes might be unflattering, but jewelry and handbags can still be fun to buy.

    6.  Inventory is less of a challenge, one-size fits-all – accessory retailers do not have to buy as deep into each style.  Fewer skus per style and less inventory on-hand will help keep turn rate high.  Don’t have to worry about becoming broken in sizes like in apparel.  Apparel needs to own a minimum of a full size run, or else be forced into an early markdown (just to give you an idea of size range per style: kints - 5 sizes; wovens - 7 to 12 sizes; denim - up to 26 sizes).

     

    7. Tried, tested and proven resiliency - one trend may go out of style, but others soon come in to take up the slack.  Whether it be pendants this year, bohemian necklances or Sarah Jessica Parker Sex in the City big gold hoop earrings, there is always some type of accessory that is in style.  Next time you go for lunch, look at the grandmother, mothers, daughters walking the streets…they are all wearing accessories of one type or another whether it be earring, bracelets, rings, or fashion watches.  It has always been this way, and given the dress-up habits of my 2 and 4 year old girls I suspect it won’t ever change.  This anecdotal and non value added comment is supported by the very resilient historical sss figures of Claire’s over the years, which lends evidence that a customer is more likely to stop buying $100 ANF jeans before they stop buying $5 trinkets. 

     

    8.  If you are successful and establish yourself as a destination store, both BB and Claire’s have proven you don’t need to spend money on advertising to attract customers.  This is a big help to margins.

    Advantages of large chains vs mom&pops:
    1.  Bigger buys = lower costs
    2.  Ability to transfer goods in which performance differs regionally

    To address the obvious, this is also an industry that has low or virtually no barriers to entry.  However, we will offer up the clique that retail is a devil in the details business, particularly so for a dedicated accessories retailer for the following reasons:

     

    1.  Very sku-intensive, meaning more work for the buying office to buy all the different styles, monitor performance, etc (BB has 9k SKUs)

    2.  Presentation is a challenge - with all that merchandise, fixtures can quickly become very messy, and thus, visually unappealing.  Also, without mannequins to wardrobe, it takes a certain knack to put together attractive displays…more difficult to romance the merchandise via elaborate sales displays.

     

    3.  IT can be rather tricky as one rolls out many stores due to complexity of sourcing and distribution given large number of sku’s.

     

    All of the above challenges may be easily overcome for a small chain of 5,10 or perhaps even 50 stores, but to build up a business similar in size to that of Claire’s or BB strikes us logarithmically more challenging and time consuming.

     

    Perhaps that is the reason Claire’s has been the only name of critical mass in the US for so long and was bought out at a fancy multiple (11x EBIT) by Apollo last year (worth noting Claire’s has a more developed store base and less growth opportunities than BB).  OK, maybe it was just because Apollo could just get a ton of cheap debt, but I digress.

     

    The typical unit economics for BB are as follows:

     

    Initial capex           E100k

    Initial inventory     E50k

    Initial investment   E150k

     

    Avg store sales based on 2006 data   E400k

    Approximate 4 wall EBIT margin        40%

     

    ROI  - ~100%

    Payback – ~1 year

     

    These numbers are not exceptional to 2006.  In fact, the return on net assets for the organization for the last three years is as follows:

     

     

     

    2003

    2004

    2005

    2006

    Sales

     

       164.9

       223.4

       301.6

       348.0

      % change

     

    34.5%

    35.5%

    35.0%

    15.4%

     

     

     

     

     

     

    EBIT

     

         45.5

         73.8

       111.5

       121.5

      % margin

     

    27.6%

    33.0%

    37.0%

    34.9%

     

     

     

     

     

     

    Avg Net Op Assets

     

     

         39.0

         53.2

         68.0

    EBIT/Avg Net  OPAssets

     

    189.2%

    209.5%

    178.7%

     

    BB’s ~950 stores are currently represented in Germany, Netherlands, Austria, Spain, France, Italy, Greece, Hungary, Poland, Portugal and to a much lesser degree the US and UK.  Management has opened between 100-140 stores during each of the past 4 years. 

     

    The company has been successful in every market it has entered.   The company recently opened 2 stores in the UK, a market management believes has potential for 400 stores.  On continental Europe management believes there is potential for another 1,000 stores.  In the US, where Claire’s operates circa 2,000 stores, BB opened its first 2 stores last year. 

     

    After positive feedback in the US, management expects to accelerate the pace of the US expansion with an ultimate target of 1,000 stores down the road.  We would agree with management that the concept is proven, and echo management’s public statement that BB has “enormous expansion potential internationally” (Annual Press Conference Release, 2007).

     

    In light of the vast opportunities for expansion, management is focused on maximizing the value of the model in a disciplined and measured fashion.  The team will open new stores as quickly as they can find suitable locations, but no quicker (think of Buffett and his desire that his insurance companies don’t write policies just for the sake of writing policies).  If management can’t find attractive locations they will scale back the opening schedule so as not to compromise the economics of the business model.  For 2007 they have guided to a slower than historical pace of 80 net openings.  Perhaps next year will be more, perhaps it will be less, perhaps the same.  Ditto for 2009, 2010, 2011, etc.  Management cannot tell you with certainty how many stores will be opened each year, but they have built up the people and infrastructure to handle 150 per year.

     

    Not surprisingly given management’s focus on the long-term, there is no coverage by any global brokers, and the name can largely be considered below the radar if you talk with European retail analysts.  This is in stark contrast with the public perception of BB among its addressable market, whom regard the retailer as top of mind for the purchase of fashion jewelry.  Think a sophisticated and well presented Claire’s (without the Dora the Explorer earrings), but catering to an older and more sophisticated customer.

     

    With such a long-term outlook management has little concern for whether like for like sales are +3% or -3% in any given year.  Unfortunately for the momo investors, after three years of double digit lfl’s, the wheels fell off in 2006 with negative 2% lfl’s.  To add insult to injury the company had the audacity to further report negative lfl’s of 3.2% in the first quarter of 2007 and negative 3.6% in Q2 2007.  We suspect 5 years from now very few people will be talking about or even remember what 2007 or 2008 lfl’s were, but time will tell.  

     

    Rightly or wrongly we have made a bet the current level of sales per box is more or less sustainable, and that is core to the investment thesis.  As a data point Claire’s Europe averaged sales per square foot of USD791, USD862, USD892 in 2003, 2004, 2005 respectively.  Based on some rough estimates and discussions with management (sales/sqft are not formally disclosed), we believe BB is running at levels a little below those of Claire’s (our estimate is about USD800/sqft in 2006).  Management believes sales/sqft are sustainable, and if anything will go up over time rather than down. 

     

    We believe the current share price reflects expectations of negative lfl’s (similarly sales per sqft declines) for the remainder of this year as well as the next two years.  If that is the case the stock is probably fairly valued at present.  If management manages to start generating positive lfl’s at any point in the next few years we think the stock is too cheap. 

     

    Some may find it worth nothing that this exceptionally conservative management team noted in the second quarter press release that “Although the negative sales trend was still clear in April, business development has been positive since June, so that a better result can be expected in the third quarter”.  This business has notoriously little visibility, but from our research we have found nothing to suggest the business is suddenly broken.  Competition has steepened over the past few years as more and more department stores and apparel retailers have begun to realize the attractiveness of the accessories market, but we don’t see the limited offerings of general merchants permanently displacing a specialist retailer such as BB.

     

    The key risk as we see it is that further expansion by chains such as Claire’s and European competitors (e.g. Six, Accessorize) saturate the market leading to lower sales per box for all players.  From our research we believe BB skews towards older customers than Six or Claires such that in general terms it is more likely for BB to capture the occasional core customer from these chains than vice versa.  Big picture the easiest way to describe this is that a 30 year old woman is less likely to shop at Claire’s than a 13 year old is likely to shop at BB.  This viewpoint is somewhat reaffirmed by Claire’s use of Icing by Claire’s (often in the same mall as a regular Claire’s store) that targets the slightly older and more sophisticated customer.  Lastly, we speculate that it will be the smaller chains or independents that feel the most pressure in a more competitive  market, leading to ultimate closure of some of the more peripheral players.

     

    As for the actual managers in question, the company is family run. The father was the original founder, the son the current CEO.  We have had telephone discussions or in person visits with the founder, the son, and the CFO (who is not a blood relation but given the similarities in philosophies one could easily be mistaken otherwise).  Each key individual “gets it”.  The company has not produced the margins and ROC they have by accident.  They have built the organization (IT, infrastructure, human resources) with the intent of delivering sustainable returns for the long haul.  Management owns 50+% and have told us explicitly they will never sell a single share.  Compensation is very reasonable, options nonexistent. The CEO (son) has told us “This is the last job I will hold until I die” and is managing the business with that in mind.

     

    As for commitment to shareholders, we suggest you look at past dividends as data points.  The company has historically had a high dividend payout ratio via a combination of regular and special dividends.  Management has told us explicitly the dividend is going up and not down.  Management has told us explicitly they have absolutely no intention of becoming a bank (e.g. hoarding cash).  If the company EBIT develops as we believe, the company will have no choice but to ramp up the dividend such that it is not inconceivable that in 2009 the shares will be yielding ~7%+.  That being said, we expect next year’s dividend to be E7.00-7.50/share, which implies a current yield of ~5.5-6%.

     

    Before presenting the current EV, I will ask you take a moment to be intellectually honest and ask yourself what you would pay for a business with the previously described economics, long runway to open additional high ROIC stores, run by a management team that is looking to add value with every cent they spend.

     

    The current EV breaks down as follows:

    Share price       E124

    S/O                  8.1m

    Mkt cap           E1,000m

    Cash                E156m (end of Q2 2007)

    EV                   E850m

     

    Since 2006 was the last full fiscal year, I present the current valuation based on 2006 actuals:

     

    EV/EBITDA                                        6.3x

    EV/EBIT                                              6.5x

    EV/FCF excluding growth capex          11.3x

    EV/FCF including growth capex           13.5x

     

    We do have an internal model, but to make thinks easy let’s just assume we have flattish earnings expectation for 2007/2008 vs 2006.  As a data point, 1H 2007 net income was E33.4m, down from E34.3m in 1H 2006.  2007 results have been negatively impacted by an increase in German VAT (up to 19% from 16%), while looking forward 2008 will benefit from a reduction in the corporate tax rate in Germany.

     

    We believe the prior multiples suggest good value, as does the dividend yield.  At these prices one could optically argue you are paying around 10x for forward looking FCF excluding growth capex, which suggests you are getting future growth for free provided the runrate in earnings from the present store base is sustainable.

     

    The downside of the name is that like many retailers the visibility on quarterly revenue is limited at best. To preserve margins at the current level our model suggest you need 2-3% positive lfl’s, which coincidentally was the same figure quoted by Claire’s management on their recent conference call for bondholders.  

     

    On the upside, the financials could not be cleaner, management is completely transparent when you speak with them, they are very gracious hosts if you take the time to visit, and they are truly committed to sharing the rewards of success with shareholders by increasing the dividend. 

     

    Overall it strikes us that there are minimal expectations in the current price and one may be pleasantly surprised at some point over the next year or two.  If things just muddle on with +-2% lfl’s you still have a high single digit FCF yield even after deducting for growth capex.  For an unlevered stock with a decent dividend yield and a billion dollar plus market cap, that strikes us a reasonable risk/reward situation.

    Catalyst

    Nothing immediate, perhaps return to positive LFLs down the road

    Messages


    SubjectNew Writeup
    Entry10/29/2007 11:13 AM
    Memberdylex849
    Description:

    Quick -  name three successful mass market retailers who spend virtually zero money on advertising. 

     

    Other than perhaps Costco, how many could you name?

     

    I am now going to describe a highly successful international retailer who you have likely never heard of, but who has some of the most incredible economics you have ever seen in the retail industry.  To top it off the company is run by an experienced and profit focused management team, has 50%+ inside ownership, an exceptionally high dividend yield for a billion dollar plus market cap (~6%), great magic formula numbers (pretax return on capital of 100%+, pretax earnings yield of ~15.0%), and has a very long runway of growth ahead of it (10+ years).  Once you are finished reading the writeup you will also be able to name one successful retailer aside from Costco in response to the opening question.

     

    Bijou Brigitte (BB) serves the mass market for fashion jewelry.   We think this is an attractive industry for the following reasons:

     

    1.  Margin-rich (BB has averaged gross margins of ~85% for the past three years)

    2.  Speed-to-market - ie. much shorter lead-times than apparel - can deliver the hottest fashion trends to market quickly

    3.  Can cover down-trending businesses w/trending ones - companies that are not multi-faceted are challenged in this way ie. when denim is out-of-style or -season, Levis cannot make up the sales through other product categories.  Same goes for Hot Topic and goth, ANF for preppy.  Accessories retailers can react by simply shifting the composition of their businesses.

    4.  Mass appeal which enable economies of scale for large players - less fashion-forward people can participate in the current trends, so product would be viable in the Midwest US or small town Europe, just as with people in NYC or LA (in contrast to skinny jeans which some of you may have noticed are less than flattering on the less than skinny portion of the population).

    5.  Accessories are an easier sell for many reasons:
    - people with smaller budgets can use accessories to update their wardrobes at minimal cost. 
    - not as big of an investment as apparel, so less thought goes into the purchase. 
    - if a customer has gained weight, clothes might be unflattering, but jewelry and handbags can still be fun to buy.

    6.  Inventory is less of a challenge, one-size fits-all – accessory retailers do not have to buy as deep into each style.  Fewer skus per style and less inventory on-hand will help keep turn rate high.  Don’t have to worry about becoming broken in sizes like in apparel.  Apparel needs to own a minimum of a full size run, or else be forced into an early markdown (just to give you an idea of size range per style: kints - 5 sizes; wovens - 7 to 12 sizes; denim - up to 26 sizes).

     

    7. Tried, tested and proven resiliency - one trend may go out of style, but others soon come in to take up the slack.  Whether it be pendants this year, bohemian necklances or Sarah Jessica Parker Sex in the City big gold hoop earrings, there is always some type of accessory that is in style.  Next time you go for lunch, look at the grandmother, mothers, daughters walking the streets…they are all wearing accessories of one type or another whether it be earring, bracelets, rings, or fashion watches.  It has always been this way, and given the dress-up habits of my 2 and 4 year old girls I suspect it won’t ever change.  This anecdotal and non value added comment is supported by the very resilient historical sss figures of Claire’s over the years, which lends evidence that a customer is more likely to stop buying $100 ANF jeans before they stop buying $5 trinkets. 

     

    8.  If you are successful and establish yourself as a destination store, both BB and Claire’s have proven you don’t need to spend money on advertising to attract customers.  This is a big help to margins.

    Advantages of large chains vs mom&pops:
    1.  Bigger buys = lower costs
    2.  Ability to transfer goods in which performance differs regionally

    To address the obvious, this is also an industry that has low or virtually no barriers to entry.  However, we will offer up the clique that retail is a devil in the details business, particularly so for a dedicated accessories retailer for the following reason
    Catalyst: Nothing immediate, perhaps return to positive LFLs down t


    SubjectQuestions
    Entry10/29/2007 02:51 PM
    Memberdavid101
    Dylex,

    My questions are:

    1. Do they hedge against commodity prices for their inputs?

    2. Are they able to pass along price increases in their COGS?

    3. What kind of jewelry do they sell? Do they focus on big ticket items, like diamonds and gold, or are they more necklaces, earrings?

    4. How would you compare them to Blue Nile, Zales and Tiffany?

    David

    SubjectDavid
    Entry10/29/2007 03:05 PM
    Memberdylex849
    1 & 2. I am not aware of any hedging. I don't think they are particularly worried given their gross margins...perhaps a 4% price increase is required to offset a 20% increase in input costs. Simple math but if you have $100 in sales and $85 in gp, your cogs is $15. Say cogs increase by 20%, you then have to raise your selling price by $3 to offset the increase. Historically neither BB nor CLE have had any trouble putting through such increases. BB is an important customer of their suppliers (in many cases the largest), so they are negotiating from a position of strength.

    3. You can go on their website to view, but they sell fashion jewelry...avg items costs about E5-6. As such focus is on necklaces, earrings and not actual "jewel"ry. Think costume jewelry...gold hoops but not actually made of gold.

    4. No comparison at all to Blue Nile, Zales, Tiffany. Perhaps I should have been more explicit in the writeup, but this not a real jeweler per se but a mass market retailer of low priced fashion jewelry. Think impluse purchases of a cheap bracelet to match the dress you just bought from Zara or H&M.

    SubjectMore detail on SSS?
    Entry10/30/2007 01:23 PM
    Memberelan19
    Thanks for posting this idea. It's a name I'm familiar with thanks to my involvement with Claire's a few years ago. Do you have any more detail on the reasons for the declines in SSS of late (I assume you mean SSS when you say LFL - though I don't know what the LFL acronym stands for).

    I hunted through English version of the last annual report and the last 2 quarterly press releases and could not find any explanations for the sales declines.

    For understanding the ups and downs of Claire's, a critical disclosure was the percentage of sales that was Jewelry as opposed to accessories (Jewelry had a higher average selling price and higher gross margin). At Claire's, Jewelry (as % of total sales) was typically in the 45% to 55% range but results suffered in 2001 when it was declining towards the bottom of this range and then results rebounded fantastically over the last few years when Jewelry inexplicably went not just to the top of this range but then kept going up until the company was purchased.

    So I am wondering if Bijou has benefited from this same fashion anamoly? If so, how can one get comfortable that Jewelry will remain at a similar, historically high level of sales? Given that you've been able to have talks with management, I am wondering if you have access to this information, which I have not yet been able to find about BB.

    I would also be interested if there have been any other high margin categories driving SSS and Gross Margin over the past few years - and that may have gone into reverse starting a year ago.

    Or any other detail on the sales decline you can provide. Detail on reasons for the great SSS advanceds of prior years would also be helpful.

    Thanks in advance.







    SubjectSSS/LFL
    Entry10/30/2007 03:49 PM
    Memberdylex849
    LFL or like for like, European nomenclature for SSS.

    BB benefited from same trends as CLE that you are likely familiar with (Bohemian layered look). From discussions with CLE and BB they have each lapped these buoyant periods and that explains part of softness in 2006. Mgmnt would tell you that increased competition also had a negative impact.

    From a company specific perspective during the strong SSS period, BB professionalized the organization by putting in a new IT system (big deal for them and very proud of it) that allowed them to meaningfully improve delivery of items such that they could do a much better job of getting right goods to the right place at the right time. Also improved POS at store to speed up check out, renovated some older stores, paid increased attention to store layout (think planogram type stuff analogous to CLE emphasizing impulse purchases at the checkout counter).

    No categories that I know of that drove sales by an unusual nature. They have 9,000 or so SKU's, of which about 35% are plain jane commodities and 65% internally designed. GP has been steady past few years to I don't see any gp margin decline in the numbers to comment on...YTD gp margin firm as well.

    As for dearth of info on LFL in the annual, the company takes the long term approach and does not seem overly fussed with LFL from one year to the next. I am not saying this is right or wrong, but they take the lt approach to maximize value over 30 years rather than 30 days (e.g. they opted to custom build an IT/POS system inhouse including software and hardware as mgmnt felt this was the only way to design something they could fully trust and meet their information requirements). One reason they are not fond of speaking with investors is that they believe everyone is myopic and overly focused on near term LFL.

    Mgmnt has said they are not currently feeling positive effect of any jewelry trends that would be equivalent to the bohemian trend mentioned previously. As such they view sales as a normalized base with opportunity to improve going forward on a per square foot basis. I suppose your CLE history gives you some familiarity with historical LFL for the industry, which historically have not been overly volatile to the downside

    SubjectThe jewelry fashion cycle
    Entry10/30/2007 04:17 PM
    Memberelan19
    CLE actually did have negative high single digit SSS during the last half year of 2001 for 4 or 5 months, and EPS was cut in half that year. That was when I bought. Much as I studied and thought I knew the company, it wasn't until at least a year later that I realized that much, if not most, of the negative SSS in the core Claire's stores was due to reduced jewelry sales as a percentage of overall sales - at the time I thought it was just a minor contributor (there was also the struggling acquired stores but that's another issue).

    I agree that retailer investors are all too often myopically focused on SSS for the next quarter, and this leads to terrific opportunities when comps are down. But to understand the true earnings power for CLE or BB, it really is helpful to understand where they're at in the Jewelry cycle. Your comments help somewhat - if I'm reading you right, BB is still perhaps moderately above trend in sales per square foot as the company comes off historically high jewelry sales as % of overall sales. Sales per square foot are perhaps still higher than what they would be if Jewelry sales were average.

    This means the following possibilities:

    Jewelry as % of sales rebounds to off-the-charts levels of 2004-2006. Comps rebound strongly.

    Jewelry as % of sales stabilizes at current above-average levels - comps return to mid single digit range.

    Jewelry as % of sales returns to average levels of 5-10 years ago - comps continue negative for another 1-2 years until this average is reached - and then you have a normalized sales and earnings base from which future growth occurs. In the absence of more detailed information (which as a U.S. citizen I'm not sure how to get) - I would have to assume this is the most likely possibility.

    Jewelry as % of sales goes to below average levels - could lead to really bad comps over the next few years until the trend finally reverses. Could mean EPS cut in half during one of those years - and then you have a really stupidly depressed stock price - like happened with CLE in 2001.

    Sounds like you are able to get nice information from management (do you speak German?). Any chance you could obtain and post Jewelry % of overall sales over the past 5 years? I figure it can't hurt to ask, though I understand the company may not want to disclose this information.


    SubjectAccessories/Jewelry split
    Entry10/30/2007 04:38 PM
    Memberdylex849
    Unlike CLE, BIJ is more or less a pure play jewelry play. They don't have a sizable accessories biz, so no numbers to break out or mgmnt do disclose. For simplicity sake just assume the BIJ biz is similar to the CLE jewelry biz.

    If you speak with CLE or BIJ mgmnt they will tell you jewelry is not running above trend right now. If you ask BB mgmnt explicitly about sales/sqft they will tell you there is room for improvement and sales are not puffed up by any x/o trends. I flip through my wife's fashion magazines and all I can really tell is that it seems like pendants were hot in the summer, but what do I know. From flipping through these magazines in the bathroom over the years it would seem there is always some jewelry trend that is popular.

    The bohemian trend was unique because it was a layered necklace look...multiple items and necklaces have higher than avg selling price. This trend is over, which is why I believe CLE and BB state that they don't believe they are running above trend right now. If you go back to CLE 2006 reports and conf calls you will read that they said jewelry trend had run its course and was flattish after a strong upturn since 2003.

    I also seem to recall (perhaps mistakenly though) that CLE negative comps in 2001 were following 9/11 during a general period of weakness for retailers (particularly mall based). Prob better to double check this for yourself as my memory is like a steel trap, rusty and illegal in most states.

    From my model, you need ~negative 25% LFL to see earnings cut in half. FWIW this mgmnt team is head and shoulders above CLE's, with whom I was never particularly impressed.
    Personally I assume negative LFL in 2007 and 2008 in my model followed by inflationary increases thereafter.

    I don't speak German...mgmt speaks English :)

    SubjectThanks
    Entry10/30/2007 05:28 PM
    Memberelan19
    Thanks for your detailed replies - extremely helpful and increased my understanding of the situation a great deal. I've never visited a BB, so had not realized that few accessories were sold there - just incorrectly assumed the product mix was similar to CLE (though I knew it was a wider age range).

    2001 CLE had three things going on: Jewelry decline, absorbing the acquisition, and the 9/11 scare and subsequent decline in mall traffic. I don't have the numbers in front of me currently, but I remember being quite surprised when I laid out SSS by year with Jewelry as % of sales - very obviously correlated.

    You have obviously done a good and thorough job researching BB.

    SubjectOne more question
    Entry10/30/2007 05:30 PM
    Memberelan19
    Have you or agents working for you visited BB stores as well as indirect competition? If so, can you share your observations?

    Subjectthanks so much. appreciated.
    Entry10/31/2007 04:18 PM
    Membergocanucks97
    thanks so much. appreciated.

    Subject2003?
    Entry10/31/2007 04:55 PM
    Memberelan19
    Not being able to read German, and the annual reports only being translated for last two years (and not the entire reports, at that), I'm having trouble getting up to speed on this, especially on the qualitative side - so your comments are incredibly helpful.

    I know you tried to answer this already for Canuck on margin expansion, and I know you said that the bohemian trend was great for business from 2003 to 2005, but the weird thing that pops out at me is that EBIT margins through 2002 had always been in the 18% to 22% range (18.6% in 2002), and then went up spectacularly in 2003 to 29.9% and have been higher than that ever since (and you're thinking they'll continue to be around 30%). So something happened in 2003 that was different than the next two years, where sales increased by similar amounts per year and thus experienced similar leverage (well, I see that 2005 took a bit more investment to get there, but certainly 2004 looks similar). Claire's EBIT improved from 12% to 15% from 2002 to 2003, in comparison.

    Did something fundamental about the business permanently change in 2003? I actually have a report from Berenberg Bank dated February of 2003 projecting EBIT margins to gradually rise to just above 19% over the next 3 years so obviously what happened in 2003 was a huge surprise. Was this entirely due to the Bohemian trend or were other factors at work, such as finally gaining profitability in certain countries after several years of investment? Other factors?

    Related question: What happened from 1999 through 2002, when EBIT margins steadily dropped from 21.4% to 18.6%? Was that just a matter of unlucky fashion trends (which was obviously then followed for the next few years by a once-in-a-century bohemian trend)?

    SubjectTranslations
    Entry10/31/2007 05:48 PM
    Memberelan19
    Is it possible to obtain English translations of the entire annual reports back to 2001 from the company or some other simple source? Or did you hire a translator (or use automated software) to do it?

    SubjectMargin Source
    Entry10/31/2007 05:56 PM
    Memberelan19
    I got my margin data from the company's web site:

    http://www.bijou-brigitte.com/Investor-Relations/Key-Figures/c_66_95.php?main_page=bb_kennzahlen

    But when I typed in my note on it, I managed to grab some wrong numbers (sorry for confusion) - though it didn't change my overall point. The EBIT margins from the company's 5 year historical chart say:

    17.3% 2002
    29.7% 2003

    The data prior to 2002 came from that old Berenberg report I have and were listed as:

    1999 21.4%
    2000 19.4%
    2001 19.2%
    2002 18.5%E (estimated - actual came out at 17.3%)


    SubjectHistorical English Figures
    Entry10/31/2007 07:23 PM
    Memberdylex849
    IR at BB has emailed me financial statementents going back to 2003. Unfortunately full annual reports with verbiage are not available for older years, just the financials. I am friends with a German PM who helped me with data for earlier years.

    SubjectManagement
    Entry11/12/2007 10:10 AM
    Memberthoreau941
    I tried contacting management, and IR said that they are not taking meetings until January. Do you know the reason for this? Is there a way to talk with management before then?

    SubjectQ4
    Entry01/10/2008 01:22 PM
    Membermiser861
    pretty crappy q. do you have any updated thoughts on whether this is an weak economy issue, a jewelry specific issue, or an increased competition issue? also any thoughts on where ebit margins might bottom out?

    Subjectmanagment buying?
    Entry01/27/2008 02:53 PM
    MemberSpocksBrainX
    sorry - my ignorance - how do you know this?

    Subjectthanks
    Entry01/28/2008 11:02 AM
    MemberSpocksBrainX
    and thanks for the whole darn idea and thread.

    Subjectmore dumb person questions
    Entry01/28/2008 11:05 AM
    MemberSpocksBrainX
    is there an EDGAR equivalent in Germany? Place for normal public filings?

    sorry - I'm dumb and dumber in anything foreign-related (and plenty of domestic too)

    Subjecttwo dumb questions
    Entry04/09/2008 10:22 AM
    MemberSpocksBrainX
    cause I don't know the answers. Any help appreciated - and these notes have been very much helpful and appreciated. so:

    1. any reason why comps continue to be negative? They seemed to imply comps would be negative in q1 and since I don't know the region or area I have no sense as to economic climate where these stores sale their wares.

    2. so why it is at this valuation? Despite issues with comps profits were almost flat last year, dividend is fat, pe low, and as noted they are buying shares. Plus, from what I see, management certainly seems first-rate. So why the valuation?

    is it just comp fear? Overall weakness in Europe? Overall low valuations in Europe? something else?

    again, any help greatly appreciated

    Subjectthanks
    Entry04/10/2008 09:33 AM
    MemberSpocksBrainX
    as always. I think I'll just hold what i have and look here in 6 months....

    Subjectnot down on name
    Entry04/15/2008 12:40 PM
    MemberSpocksBrainX
    At all. In fact, from the insider buying and the buyback, it has given me even more confidence to just ignore it for the most part, which is the highest compliment I can give to any position, especially in retail.

    Of course, I should admit that I can't buy this name except on the pinks and the spread there is terrible even if you can get some of the shares which is very hard.
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