This Specialty Retailer Looks Interesting

Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Since 2005, New York & Company (NYSE: NWY) has declined nearly 83%, from $24.24 per share to only $4.20 per share. However, if investors bought New York & Company's shares at the beginning of this year, they would have realized a gain of nearly 13%.

Currently, the biggest shareholder of New York & Company is Irving Place Capital with more than 31.6 million shares, accounting for 50.68% of the company’s total outstanding shares. Is New York & Company is a good buy at its current price? Let’s find out.

A long operating history

New York & Company is a specialty retailer of women’s fashion apparel and accessories, operating 519 retail stores in around 43 states in the U.S., offering shoppers wear-to-work and casual apparel, including dresses, pants, jackets, etc.

The company's history dates back to its establishment in 1918. In 1985, Limited Brands (NYSE: LTD) purchased New York & Company. Irving Place Capital bought the company in November 2012, and listed it on the New York Stock Exchange in 2004.

An improving operating performance and a strong balance sheet

In 2012, the company generated around $966.4 million in revenue, a bit higher than 2011 net sales of $956.5 million. Comparable store sales experienced a slight increase of 0.1%, an improvement from a decline of 3.3% in 2011. Net income came in at only $2.1 million, or $0.03 per share, versus a loss of nearly $39 million, or $0.64 per share in the prior year. Net sales per average selling square foot increased from $324 in 2011 to $345 in 2012.

What I like about New York & Company is its conservative capital structure. As of February 2013, it had $106.2 million in total stockholders’ equity, $60.93 million in cash, and no debt. The three biggest items in its liabilities are accounts payable of $74.4 million, accrued expenses of $51.2 million, and deferred rent of more than $48.8 million.

New CEO is driving a turnaround

Recently, Barron’s featured New York & Company as a potential investment opportunity. The company has been turning itself around for the past two years under Greg Scott, a CEO with an experience of around 20 years in the retail industry. The company has moved its business focus to active-clothing lines, including yoga wear.

In terms of marketing, the company has tried harder to drive more traffic for holiday seasons. It also launched its new fashion book with Eva Mendes being the new ambassador of the brand.

An efficiently run retailer

However, I am not so impressed with its valuation. At around $4.20 per share, the market values New York & Company at around 5.40 times EV/EBITDA. Compared to its ex-parent, Limited Brands, and one of its peers, ANN (NYSE: ANN), New York & Company is not screamingly cheap.

Limited Brands, at around $50 per share, has a total market cap of around $14.5 billion. The market values Limited Brands the most expensively among the three, at 8.72 times EV/EBITDA. ANN, the owner of Ann Taylor and LOFT brands, has the cheapest valuation. It is trading at $30.20 per share, with a total market cap of around $1.4 billion. It is valued at only 4.6 times EV/EBITDA.

In the beginning of March, ANN announced that it had launched international shipping on its e-commerce sites for both Ann Taylor and LOFT brands. The company believed that it could begin to meet the previously under served demand for the its brands from overseas.

In order to measure how quickly the retailer turns its working capital into cash, the cash conversion cycle is used. New York & Company seems to have the most efficient operation with the lowest cash conversion cycle of 21.7 days, while the cash conversion cycle of both Limited Brands and ANN are much higher, 35 days and 42 days, respectively.

Limited Brands has the weakest balance sheet of the trio, with a negative book value of more than $1 billion, and significant long-term debt of nearly $4.5 billion. Both ANN and New York & Company have a strong balance sheet with no interest-bearing debt.

My Foolish take

Barron’s commented that in the next 18 months, the turnaround could lead to an increase in its operating margin and a stock price gain of around 40%. New York & Company seems to be quite attractive due to its strong balance sheet and low cash conversion cycle. It could be a decent opportunistic stock for investors. However, I am personally not so excited due to its expensive valuation. 

Anh HOANG has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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