An IPO for the Beach
Eric is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Summer brings up thoughts of surfing, the beach, and having fun outdoors. Shoppers often buy clothing designed for outdoor activities, which has helped recently public Tilly's (NYSE: TLYS) show good results. Tilly's sells skate and surf clothing and accessories, has a current market cap of $430 million, and the company has added more stores in recent years and plans to add more. Tilly's has been selling clothing since 1982, so it has also demonstrated some longevity, which is important in a sector that's prone to fads.
Tilly's has had a store in my area for a while, and I bought some clothing there in the late 1990s and early 2000s. The company markets its clothing to teenagers and college students, like its competitor Zumiez (NASDAQ: ZUMZ). Some of the other popular stores from that era have not held up nearly as well. Pacific Sun (NASDAQ: PSUN) once had stores throughout the malls in California and was very popular with students and young board sports athletes, but now it's struggling to stay in business, with a negative 10.8 percent profit margin and a negative 43.5 million operating cash flow. Pacific Sun has been shutting down stores to stem its losses, but it still had 733 stores in March, more than 5 times Tilly's count of 140 stores. Tilly's could attract even more shoppers from Pacific Sun if Pacific Sun does go under, although if Pacific Sun does manage to turn its fortunes around Tilly's could miss out on some sales.
Zumiez had 444 stores in January, according to Yahoo Finance, so Tilly's is smaller than both Zumiez and Pacific Sun, which shows that Tilly's has room to grow. Over the last few years, Tilly's has been growing rapidly. Tilly's S-1/A reports that Tilly's had 61 stores at the end of fiscal 2007, so it more than doubled its store count by fiscal 2011, even in the midst of a major global recession. This filing also stated that Tilly's planned to increase its store count by 15 percent a year over the next few years. Because of its expansion plans, Tilly's doesn't pay dividends, which is not unusual for a fast growing clothing company. Zumiez also doesn't offer dividends because it plans to grow rapidly, and Pacific Sun is recording large losses so dividends are very unlikely.
Zumiez does expect to grow faster than Tilly's and has a slightly better profit margin, although these statistics are reflected in these companies' valuations. Yahoo Finance gives Tilly's profit margin as 5.2 percent, lower than Zumiez at 6.9 percent. Tilly's has a 1.19 PEG, which is lower than Zumiez' PEG of 1.36. Zumiez also doesn't have any debt, although Tilly's S-1/A shows that Tilly's should be able to maintain its expansion rate in 2012 while paying down its debt. Tilly's has $21.72 million cash, much more than it needs to pay off its $4.47 million debt. Tilly's balance sheet shows a long term trend toward lower debt, as its total debt fell from $6.93 million at the end of fiscal 2007 to $4.64 million at the end of fiscal 2011. Tilly's continued to add stores while reducing its debt even further during the first quarter of fiscal 2012, and with its 2012 IPO, it collected $23 million that it can use to expand.
Tilly's opened at a cheaper price than several prominent recent IPOs, and the retailer's results over the last few years show a strong growth trend and improving earnings. Although Tilly's comparable store sales figures did dip during the recession, showing that this clothing store is vulnerable to a poor economy, Tilly's comparable store sales figures of 6.7 percent for fiscal 2010 and 10.7 percent for fiscal 2011 show a positive trend. With a lower PEG ratio than Zumiez, and competitor Pacific Sun closing stores, Tilly's could be a good way to enter the surf and skate clothing business.
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