New York & Company: Value Opportunity

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

New York & Company (NYSE: NWY) is a deeply undervalued company that should prove to be a major winner over the next few years. The company has suffered continued losses over the last few years and as a consequence, the stock is cheap. Despite losses, the company's positioning in the market remains strong and a restructuring of stores should yield benefits over time. Long-term investors should seriously consider adding this stock to their portfolio. 

Market comparison

New York & Company has carved a niche for itself. Even though the company has several competitors, most of those companies offer apparel of different price and quality. Thus, New York & Company is easier to market and its customers stick around.

The biggest benefit to the customers of New York & Company is their cheaper apparel. In addition, the clothes sold at New York & Company are fashionable, and the company offers customers a range of coordinating apparel accessories to complete their wardrobe. This combination of fashionable merchandise along with lower prices forms New York & Company's competitive advantage. Even though NY&C's apparel is cheaper, it is not of the lowest value. Case in point: A few years ago, New York & Company jeans were judged the best for all body types. In addition, the story complimented the company for the relatively low-priced product.

Contrast this with Express (NYSE: EXPR), which sells more premium quality products, but are higher priced. For instance, the denim at Express.com is arguably better looking, however, it sells at a price point of $15-$20 above those at New York & Company. This allows both companies to cater to their own markets and allow easier choices for the customers.

Another competitor, Ann (NYSE: ANN), offers apparel that is the most expensive of all three. The denim at its premier brand, Ann Taylor, sells for around $10 more than that at Express. In addition, the apparel looks more high end and is available in different colors and designs. Ann Taylor's sister brand, Ann Taylor LOFT, offers more relaxed and moderately priced apparel. LOFT competes with Express and New York & Company since its products are similarly priced.

Losses over the last few years

The company had a tough time emerging from the recession and has barely returned to profitability. Over the last few years, NY&C has carefully selected stores that have under performed and closed them. As a result, the store count was down from 589 in 2008 to 519 in 2012. This led to a decrease in revenue, as seen in the table below. Although, the company's fundamentals are strong, this restructuring has cost the company some heartache and may lead to further disappointments in the short term.

<img alt="" src="http://g.fool.com/editorial/images/63039/nyc_large.png" />

Cash reserves

The company's balance sheet is mediocre, and is susceptible to near-term results. The equity has fallen 52% over the last 5 years due to continued losses. New York & Company has found it difficult to emerge from the shadows of the recession. The annual revenue at the company is still below the pre-recession levels, and has only shown marginal growth over the past year. 

The current ratio of the company is at 1.29. The current assets have fallen consistently over the last few years, while the current liabilities have stayed almost the same. This ratio is down slightly from the 2006 figures(1.48). The current ratio is a good indicator of whether the company is prepared for a liquidity crunch. These liquidity problems may emanate from the economy as a whole, or due to mismanagement of resources within the organization. Usually, a current ratio above 2 is preferred.

Ann has a similarly low current ratio of 1.5. Express Inc., too, has a relatively low current ratio of 1.64. This suggests that NY&C's working capital is in line with that of its peers, however, this may not necessarily be good news for any of the three companies. If a credit crisis were to begin, these companies may need to make amends in their operating, financing and investing cash flows.

A silver lining on New York & Company's below average balance sheet is the absence of long-term debt. It is essential for the company to lower risk in light of falling revenues, and paying off its debt is a welcome step. 

<img alt="" src="http://g.fool.com/editorial/images/63039/nyc1_large.png" />

Stock price

The market appears to be bullish on the stock. The PE ratio (ttm) of the company is at 99.84. Although the ratio seems high at first glance, the high earnings potential of the company justifies it. The significant decrease in net loss in the last 2 years has led to the hope of high income in the next few. For instance, the net loss fell from $77 million in 2010 to $39 million in 2011. And the company showed an income of $2 million in 2012. The company has certainly had a better first quarter this year, than last year's. For instance, the net income in Q1 2013 was $1.594 million, against a loss of $211 million in Q1 2012. 

On the assumption that the company would return to regular profitability in the next 2 years, the stock seems much too cheap. An EPS of $0.44 (earned by the company in 2007) would give the stock a major boost. 

Recognizing the potential of the company, the market has remained bullish over the last year. The stock price has risen 100% since Nov 2012. It seems likely that New York & Company, based on the superiority of its business model and high value clothes, could be one of the biggest gainers in the market over the next few years. 

Key market figures 

<table> <thead> <tr><th> </th><th> <p><strong>Ann, Inc.</strong></p> </th><th> <p><strong>New York & Company, Inc.</strong></p> </th><th> <p><strong>Express, Inc.</strong></p> </th></tr> </thead> <tbody> <tr> <td> <p><strong>Return on Assets</strong></p> </td> <td> <p>10.77%</p> </td> <td> <p>0.90%</p> </td> <td> <p>15.39%</p> </td> </tr> <tr> <td> <p><strong>Return on Equity</strong></p> </td> <td> <p>24.34%</p> </td> <td> <p>3.72%</p> </td> <td> <p>35.32%</p> </td> </tr> <tr> <td> <p><strong>Forward PE ratio</strong></p> </td> <td> <p>13.76</p> </td> <td> <p>23.30</p> </td> <td> <p>12.77</p> </td> </tr> <tr> <td> <p><strong>Trailing PE ratio</strong></p> </td> <td> <p>17.45</p> </td> <td> <p>99.84</p> </td> <td> <p>15.15</p> </td> </tr> </tbody> </table>

Currently, both Express and Ann enjoy better returns on equity. However, New York & Company too is likely to see its ROE rise as it returns to continued profitability. Return on equity, along with earnings retention ratio can provide a clue about a company's expected earnings growth rate. Express has paid dividend only once in the last 5 years, and its ROE has stayed consisitently above 30% over the last four years. This gives the company a very high earnings growth rate (above 30%). If Express could do that for the next 10 years, its Annual Earnings would be 13 times higher.  In addition, Express's relatively low PE ratio makes it appear very cheap.

Ann, on the other hand, has had a less spectacular ROE over the last five years. Ann too, pays no dividends and that translates into a high earnings growth rate, if, the company can maintain its ROE (currently at 24%). The ROE has risen in the last 2 years, from 17% in 2010 to 24% in 2012.   

New York & Company has had little or no income over the 5 and thus has paid no dividends. However, the company had a ROE of around 16% in 2006, and 32% in 2005. The company did not pay any dividends on its stock, and thus, had high earnings growth during that time. As is mentioned above, the PE ratio of the ocmpany seems low in relation with its earnings potential. These facts allow for huge gains for stockholders.

Conclusion

NY&C is a suitable company for value hunters. Its stock is very cheap in relation to its prior earnings. In addition, the company has a durable business model, underpinned by cheaper merchandise and good application of newer fashions. Even though the company has had struggles with profitability, it is likely to make a turnaround soon and be a boon for investors. 


Nikhil Raheja 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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