Beyond bling

Buttonwood

Sep 20th 2005
From The Economist Global Agenda

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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