Thursday, March 02, 2006

Deb Shops: A Small Cap Teen Retailer

I regularly run a few stock screens, and Deb Shops (DEBS) has found its way through the screen on more than one occasion. I figured it was time I started taking a much deeper look at the company. After a quick glance, it looks like a reasonable company for investment.

The company was first founded in 1932 under the name Joy Hosiery by the Weiner and Rounick families. The families currently hold two key spots on the executive management team, and still own over two-thirds of the company. As of their most recent 10-Q filing, the company operates 319 DEB stores, 19 Tops n' Bottoms stores, and 3 outlet stores for clearance and slow moving inventory.

My main concerns at this point is that their sales per square foot number is not so strong and they don't look like they are expanding rapidly. Quick back of the envelope calculations reveal that they generate approximately $160 in sales per square foot annually. Compare this with American Eagle Outfitters (AEOS) and Abercrombie & Fitch (ANF) that produce roughly $400 in sales per square foot. DEBS has not had any significant increase in number of stores in the last couple of years.

Their balance sheet looks fine, but as the GZA of 12th Street pointed out, they paid out a special dividend of $6/share last year. This suggests that they don't have a better use for their cash, which is a slight negative in my book. They do continue to pay out a quarterly dividend that works out to a yield of over 1.6%.

All this said, the company does look like it should be worth more despite its somewhat high Price/Sales ratio of 1.4. Its margins are quite a bit stronger than its closest competitor, Charlotte Russe (CHIC). Also, the company flies under the investment radar with roughly 20,000 shares exchanging hands each day. If the company continues to operate as it has recently and continues to grow its EPS, potentially strong share price appreciation could follow.

More research to be done... they have an earnings conference call on the morning of March 9. Not sure if I will take a bite before the earnings call or not. Maybe no position will be established at all, but I just wanted to throw my thoughts out there about DEBS.

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