[Mb-civic] Buttonwood

[Michael Butler]

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BEYOND BLING
Sep 20th 2005  

As retailers in America and Britain fret about slowing sales, the
success enjoyed by a purveyor of cheap jewellery shows that well-run
firms need never be out of fashion

CLAIRE'S ACCESSORIES, as faithful readers know, looms large in the life
of the Family Buttonwood. Carefully hoarded pocket money vanishes in a
flash inside that emporium of rhinestone earrings, sequined slippers
and beaded bags. But your columnist had supposed her acquaintance with
this girly haven to be the sort of purely personal interest that goes
with having teenaged daughters. Fancy Buttonwood's surprise, on opening
her bi-monthly INVESTMENT QUALITY TRENDS (IQT), to find "teen and
tween" specialist retailer Claire's Stores, the American parent of
Claire's Accessories, featured as an undervalued stock pick.

Now, IQT is the bible of value investors--folk who choose shares
primarily because their yield (mainly dividends) is good, not because
their price is shooting up. The newsletter promotes the theory that
individual stock prices fluctuate between repeated extremes of high
dividend yield and low dividend yield. A smart investor will buy when a
share is undervalued (ie, the dividend yield is near its individual
historical high), hold it as the yield declines, and sell when it
reaches its historical low.

Sounds easy? No, it takes discipline. IQT repeatedly screens an
evolving universe of some 350 blue chips according to strict
principles. All companies must meet four of the following criteria:
dividend increases five times in the past 12 years; a credit rating of
A or above; at least 5m shares outstanding; at least 80 institutional
investors; at least 25 years of uninterrupted dividends; and earnings
improved in at least seven of the past 12 years.

Claire's Stores meets five of those six criteria and has two other
points of note. It has increased its dividends by at least 10% a year,
on average, over the past 12 years, and it has no long-term debt. It
has certainly made money for its shareholders. But should we care
particularly about one smallish company, whose main stock in trade is
selling flash fake jewellery? Yes, for at least two reasons.

The first is that Claire's is a reminder in this era of sophisticated
financial engineering that stockmarkets are in business to provide real
companies with real cash. The second is that retailing matters hugely
for economic growth in America and elsewhere. Consumer spending
currently accounts for about two-thirds of America's GDP growth and
retail sales make up almost half of that. In Britain the figures are
about 63% and a third.

Claire's Stores is basically a family firm, started as a wig-making
business by Rowland Schaefer in the 1960s. The company that his
daughters now run is a global accessories operation with a market
capitalisation of $2.3 billion, or 16 times earnings. It was chosen
recently by FORBES magazine as one of America's best 100 medium-sized
companies. 

The company has flourished over the years by identifying a niche
market--the enthusiasm of girls and young women for affordable glam and
glitter--and taking it abroad. It understands the fashion requirements
of its customer base. It has been brilliant at sourcing and marketing
cheap, attractive items and at managing inventories. But its momentum
may now be put to the test by economic circumstance and its
competitors. 

The big picture is not wholly helpful in America and is downright
disastrous in much of Europe. There are signs that American consumers
are beginning to flag as higher energy costs are only partly offset by
robust employment and earnings. The University of Michigan's survey of
consumer confidence, released on September 16th, showed a fall from
89.1 in August to 76.9 in September, its lowest level since 1992. The
steepness of the slide no doubt owes much to Hurricane Katrina and the
index should bounce back a bit in September, but the Michigan figures
have been unhappy for a while.

The National Retail Federation (NRF) says that retail sales rose by
7.9% in August, year-on-year, helped by a flurry of "back-to-school"
purchases. But even the upbeat NRF reckons that consumers will now
pause for a bit. A survey of retail firms at the end of August shows
them sharply more pessimistic about demand six months hence as higher
energy costs cut spending in other areas.

In Britain, further along in the economic cycle, the retail scene has
been broadly gloomy since late last year. Shopkeepers' moans were
especially loud last week, with some saying that sales were down by as
much as 20%, particularly in central London. Petrol queues and the
cricket may have kept some shoppers off the streets then, but so did
the pinch of higher energy costs and uncertainty about house prices,
neither of which looks likely to go away.

Claire's Stores is riding the wave better than many, with same-store
sales up by 10% in August, year-on-year. Its young customers are
proving anything but fickle, and its bosses have raised their forecast
of revenues and earnings for the third quarter. But these are not easy
times. Sales are growing less quickly than they did, and stores are
being closed as well as opened. Freight costs have risen. In America,
an increase in the average price per item accounted for the growth in
sales in the first half. And Claire's could be especially vulnerable to
slowdown in Europe, where it has traditionally sold twice as much per
square foot of space than in America.

Then there is the competition: the more successful a firm is, the more
its business model appeals to others. The Limited has launched a teen
clothes chain called Too. Gap is spinning off accessories into separate
boutiques called Love. And online retailing is also lurking: Forrester,
a consultancy, estimates that sales of jewellery and luxury goods over
the internet will grow from 5% of the total today to about 14% by 2010.
Though online selling may not make a lot of sense for a firm whose
average item price is $4, Claire's could still have some repositioning
to do.

At the end of the day, Claire's has survived busts as well as booms by
understanding its market and serving it cheerfully, cheaply and
efficiently. That there are hard times ahead cannot be in doubt, but in
its mild and unspectacular way, this sultan of bling will probably
manage to make money regardless. With value investing--yesteryear's
style, to stockmarket fashion gurus--losing ground to growth recently,
its share price may be unlikely to soar. But it will pay, and no doubt
raise, dividends--and that will never go out of fashion.


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