Description

OshKosh is the market share leader in branded children’s wear. They have two business segments: they wholesale merchandise to department stores, specialty stores, and discounters; they also have a retail chain where they sell goods directly. Revenues from the retail chain slightly outstrip wholesale revenues.

In the early 90’s OshKosh made some bad expansion moves and they paid the price. Margins collapsed and the stock languished. They realized their errors and made the decision to discontinue certain lines, to push more production overseas, and to lighten up their capital base. The results were terrific as can be seen by their gross margins:

‘94= 28.6%
‘95=31.8%
‘96=32.4%
‘97=36.5%
‘98=39.1%
‘99=41.9%
‘00=42%
‘01=42.3% (first 9 months)

Operating earnings nearly quintupled from $12mm in ’94 to $55mm in ’00. They reduced A/R’s and inventories by a large amount. Much of the cash thrown off as a result was used to buy back stock. Shares outstanding are currently 12mm, down from 19mm in ’98. Obviously the stock responded very favorably to these developments, going from single digits in ’95 to hitting a high of $43 this year. Even given this price appreciation I feel that OshKosh is still worth of consideration.

Foremost, the OshKosh brand is very valuable. I’m sure many of you wore OshKosh when you were younger and moms are still buying it for their kids today. IMO they wouldn’t have been able to turn things around so effectively if it were not for the power of their brand name.

This is a very tough retail environment but OshKosh has been faring much better than most. In the most recent quarter(which included 9/11) SSS rose 5.0% and net income rose 10.9%.

Valuation
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The enterprise value is $470mm. In ’00 EBITDA was $63.7mm, giving an EV/EBITDA of 7.4x. FCF(cffo – additions to PP&E) has been somewhat erratic in recent years due to some large reductions in A/R and inventories but it breaks down as follows:

‘00=$20mm
‘99=$63.5mm
‘98=$31.4mm
‘97=$29.3mm
‘96=$48.3mm
‘95=$9.8mm
‘94=$12.2mm

I expect FCF in ’01 to come in around $25-$30mm. In ’00 and continuing into ’01 inventories and A/R have increased as they’ve been looking to expand into some new markets. These assets were at depressed levels following the purge and I believe that the current rate of increase is not going to continue indefinitely. I’m going to be watching this closely, but am not overly concerned. Poor WC management was partly to blame for the rough spot in the mid-90’s and they’ve learned from that. If A/R and inventory were flat in ’01 then FCF would run around $40mm, although this is giving them the benefit of the doubt that they can limit inventory and AR growth in the future.

In 2000 OshKosh achieved ROE of just under 70% and ROI 41%. Book has increased by 36% since then which decreases the return numbers for 2001 to ROE of 52% and ROI of 33%. Still pretty good for a retailer during a recession. Note that numbers for 2001 are arrived at using data from the first nine months and the companies guidance for the 4th quarter.

The business also doesn’t require much capital. Additions to PP&E have run pretty steady in a range of about $7-$10mm since ’94. Operating earnings are up almost five-fold since then.

Finally, I think this segment of retail should weather a recession better than most. An adult can stop buying clothes for themselves if money is tight, but toddlers and young kids grow so fast that you have to keep buying new clothes for them no matter what. So far it appears that OshKosh’s business will do OK during the recession. Also, they have a new relationship with Kohl’s that looks promising and it’s going to add $40 to $45mm to revenues in ’02.

OshKosh doesn’t look super cheap but given their strong brand name, their high returns, and their ability(so far) to grow during a recession I feel that it is still attractive at the current price.

Catalyst

Penetration into new accounts and international markets will drive top-line growth.