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Claire's: Undervalued Accessories
05/26/2006 12:00 am EST
Having been the first to coin the terms over- and undervalued regarding stocks, IQ Trends has an illustrious history with a focus on viewing blue chips stocks relative to their dividend history. Here’s a look at their strategy, and a recent stock play.
"What distinguishes an undervalued stock? The most distinguishing feature is safety. At Undervalue, the stock produces a dividend yield that in the past repeatedly has halted and reversed price declines. Downside risk at Undervalue is minimal and upside potential for longterm growth of capital and dividend income is rewarding. However, it is important to see that the dividend is well protected by earnings so that the payout is maintained and the stock’s profile of value is secure.
"What distinguishes an overvalued stock? The most distinguishing feature is risk. At Overvalue, the price of the stock produces a dividend yield that repeatedly has halted a rising trend and from which major declining trends have been launched. The downside risk when a stock reaches Overvalue, the potential loss of capital and profits, simply does not justify the limited upside potential for further gain. Successful investors always balance the equation of risk versus reward. Undervalued stocks offer the greatest long-term rewards. Overvalued stocks carry the greatest risks.
"Based on this assessment, one stock that is now considered Undervalued is Claire’s Stores (CLE NYSE). Prior to 1973, Rowland Schaefer operated a successful wig business known as Fashion Tress. Later that same year, Schaefer acquired a chain of stores called Claire’s Boutiques. Within a decade Schaefer had reinvented his company and completely divested the former wig operations.
"Though it has operated under other names in the past, the company has consolidated its operations under the Claire’s Accessories and Icing by Claire’s store concepts. In North America, Claire’s Accessories stores are located primarily within shopping malls. The stores appeal to girls aged seven to 17 with a wide variety of costume jewelry, earrings, hair ornaments, and other fashion accessories.
"The company’s other store concept, Icing by Claire’s offers similar products targeted towards women ages 17 to 27. Locations include stores in all 50 states of the U.S., Puerto Rico, Canada, and the Virgin Islands. Stores average approximately 1,000 square feet. The average cost for an item in Claire’s is $4.00, making the company’s revenues all the more impressive. Recent trends have seen heavy sales of the company’s fashion jewelry inventory.
"In 1996, CLE began overseas expansion into Europe. International operations now stretch into the UK, Switzerland, Austria, Germany, France, Ireland, and Japan. Like their domestic counterparts, overseas locations provide a variety of accessories and fashion jewelry appealing to younger girls. Locations average 600 square feet, but have much higher sales per square foot than American stores.
"In April, the company lowered its outlook for the first quarter. Owing to its recent enormous gains, many investors began profit taking and initiated a fairly substantial sell-off. The company blamed the declines on miscalculations over the ever-shifting Easter season. At a recent price of $29, investors will find shares of CLE priced back to within Undervalue.
"From current levels the company has an upside potential of 176% to an Overvalue price of $80, low yield of 0.5%. As CLE has realized drastic gains over the last six months, we have expected a pullback. Based on only one quarter of slower than expected sales, we feel this has created a lucrative buying opportunity for readers. Shares will remain at Undervalue up to a price of $29.50."
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