Le Chateau: Never out of style
In the fashion world, last week is often so last year. But having the coolest – and latest – clothes at times seems almost to be part of the very genetic make-up of many folk.
And for retailers that can continually hit the sweet spot and have the right clothing and accessories on their racks, continually ringing cash registers is the reward.
For investors, that means a stock that will never go out of style on you. And that seems to be the case with one of Canada’s most successful clothing chains, Le Chateau Inc. (TSX: CTU.A).
Le Chateau was founded in Montréal in 1959 by Herschel H. Segal, who remains at the helm today. Le Chateau specializes in selling contemporary fashion clothing, accessories, and footwear to what it calls “style-conscious women and men.” Its merchandise is sold exclusively through more than 190 Canadian signature stores, and five retail locations in the United States, largely in the New York City area. The company has more than 2,800 employees who turn out over 2.5 million high quality garments a year, much of that made in its own Canadian production facilities.
If you want to play in the fashion word, you need to have relentless focus. And that’s something Le Chateau has, if you go by its own description of its activities: “Our brand's success is built on quick identification of and response to fashion trends through our design, product development and vertically integrated operations.”
The real eye-opener lies with the impressively non-fickle results of Le Chateau's long-term results. They are solid enough as to qualify as timelessly fashionable for the value-seeking set, and here, of course, I refer to investors, not fashionistas.
Sales have risen steadily each year for the last five years, from C$217.7 million in 2003, to C$303.9 for fiscal year 2007.
And that has meant good news, investor-style. On a diluted basis, earnings per share have steadily grown from C$0.37 in 2002, to C$1.45 in 2003, and C$1.98 in 2004. For 2005, EPS was C$2.84, and 2006, C$3.82. For the fiscal year ending Jan. 27, 2007, EPS was C$3.98.
Meanwhile, dividend growth – another key quality of many attractive long-term value plays – also continues apace. In April, the company announced it was raising its quarterly dividend from C$0.375 to C$0.50, a 33% increase. The move bumped the yield up to 3.1%. This represented the company’s 54th consecutive dividend. It also follows a special C$3.00 dividend in February, which underscored the company’s commitment to returning excess cash to shareholders.
Shorter-term, while April sales were up some 4.6% year-over-year, this is well below the 6.0/%-6.5% trend seen the previous two years. BMO Capital Markets analyst Adam Clark noted in a June 28 report that the weather was likely a factor, as “…temperatures were lower year over year in the five key markets we track (Toronto, Montreal, Vancouver, Calgary and Edmonton).” Noting that one bad month – or quarter – is unlikely to change its recommendations, BMO maintained its “Outperform” rating.
Drilling down further, Northern Securities analyst Sarah Alemao noted at the end of June that, although there were still five weeks remaining in the second quarter, management was reporting that the first eight weeks had been strong. Sales were up 18.2%, with comparable store sales ahead by 13.1%. This was already well ahead of Northern’s projections of total second-quarter sales growth of 12% and an increase of 9% in same store sales. Northern is now calling for an increase in second-quarter sales of 15%-18%, and for FY08 it has moved its EPS forecast up to C$4.80, from C$4.75.
BMO also likes what it sees in more recent sales numbers, and notes that the uptrend appears to be increasing somewhat as the second quarter unfolds. Also, it comes on the heals of first-quarter results that saw sales and same-store sales up 15% and 10% year over year, respectively. Noting that this “…bodes well for our Q2 EPS estimate, which may appear conservative,” BMO has a C$80.00 target.
Neil Linsdell, analyst with Versant Partners, notes that Le Chateau’s expansion plans are still on track, with significant growth planned for both the number of stores and floor space. The current store average of 3,500 square feet is expected to grow to up to 5,000 square feet. In total, the company anticipates expanding overall selling space by some 50%, from the 854,000 square feet at the end of F2007 to 1.3 million square feet. The company is also moving forward on its licensing agreements in the Middle East. Overall, the company expects its ramping up of licensing and franchising will help it reach over C$500-million in sales within the next few years.
Versant Partners’ outlook, which goes to F2010, sees the company bringing in C$438 million from 1.1 million square feet. Versant has a target of C$71.50, using a F2009 EPS forecast of C$5.11, and a 14X P/E multiple. This is down from the C$73.00 target it had prior to release of Le Chateau’s first-quarter results. The decrease was due to concern over slower-than-expected profitability. “Margins were weaker than we had expected primarily due to lower growth in the higher margin segments of footwear and accessories,” Versant said.
At its June 27 annual meeting, Le Chateau announced approval of a 4-for-1 stock split. The split applies to both the Class A bus-voting shears, and the Class B voting shares. The shares begin trading on an as-split basis on July 16, 2007.
The stock closed Wednesday on the Toronto Stock Exchange at $65.20, after establishing a new 52-week high of $66.20 the day before. Despite those lofty levels, analysts don’t think Le Chateau shares are in danger of falling out of fashion any time soon. Increased liquidity due to the stock split along with ever-increasing sales seem likely to make the stock more akin to your favourite Gap khakis – a good value, dependable, and somewhat timeless.
