Market Watch : Slumps Aid Fabric Chain
Although most stocks are struggling to stay above their 1990 lows, Sherman Oaks-based House of Fabrics Inc. is hitting new all-time highs.
The firm, the nation’s largest chain of fabric stores, saw its shares reach a new high of $29.625 during trading Friday before falling back to $29. The stock, traded on the New York Stock Exchange, is up 71% from $17 at the start of the year.
Two major positives are converging for HF right now: The company’s shift from small fabric stores to superstores is finally beginning to pay off, and the specter of a recession is raising the likelihood that more women will make their own clothes rather than buy them.
The latter may seem a severe reaction to hard times, but HF Chief Executive Gary Larkins says there has indeed been a “high correlation” between the firm’s business and economic slumps:
* In the 1974-75 recession, HF’s earnings per share rocketed 37%, from 60 cents in 1974 to 82 cents the following year.
* In the economically weak three-year period of 1980 to 1982, earnings per share soared from 56 cents to $1.28 to $1.73.
HF’s big problem has been an inability to perform well during decent economic times. After surging in the early ‘80s, earnings were mostly flat to down for the rest of the decade. The firm’s stock likewise went nowhere for about seven years.
This year, HF finally has broken out of its slump. In the six months ended July 31, earnings jumped to 45 cents a share from 18 cents a year earlier. For the year that will end Jan. 31, analyst Marsha Aarons at Montgomery Securities in San Francisco sees $2.20 a share, up 35% from $1.63 last year.
Aarons says HF failed to understand in the early ‘80s that its small stores, in malls, “weren’t attracting the customers they wanted to attract.” The serious fabric buyer wanted a big store with a broad selection. By the mid-’80s, HF got the point and began to close its small stores, shifting instead to fabric superstores outside malls.
In 1986, the firm operated 621 mall stores and 109 superstores. Today, there are 285 mall stores, while the superstore count is 330. During the next two to three years, Larkins expects the mall stores to fall to 100, while the firm opens 120 to 150 more superstores.
Meanwhile, HF’s earnings finally are turning, Larkins says, because the superstores opened in the late ‘80s are just beginning to mature. Their drawing power is evident: All year long, HF’s same-store sales have been running 10% ahead of a year earlier, Larkins says. That has continued even in recent months, he says, while other retailers have seen outright sales declines. HF’s total sales are expected to top $385 million this year.
Given the firm’s history in the past two recessions, plus the emerging superstore payoff, could earnings explode higher? Aarons believes $2.75 a share is possible next year, a 25% gain from her 1990 estimate. Meanwhile, HF has bolstered per-share results with a major stock buyback plan. The firm eliminated its cash dividend in June in favor of a 1.5-million share buyback (about 20% of outstanding shares). About 400,000 shares remain to be purchased under that plan, Larkins says.
For all its strengths, HF still can’t be sure how it will fare in this economic slump, Larkins admits. The chain’s merchandise mix is different from what was in the early ‘80s. Do-it-yourself home decorating and craft sales--drapery, upholstery and other home crafts--account for about 11% of sales, and that has been a key area of growth for HF. Whether consumers will cut back in those areas, or do more, is unknown.
Assuming HF earns $2.20 a share this year, the stock at $29 sells for 13 times earnings. That isn’t cheap. But in a market starved for stocks with healthy earnings momentum, HF could continue to attract new interest during the next few quarters. A big plus is that the firm’s balance sheet is healthy, with little debt. Plus, management owns about 14% of the stock--so Larkins and his crew have an incentive to keep the turnaround on track.
Briefly: Either corporate insiders really know something the rest of us don’t, or they are throwing lots of their money down the bear-market drain. The Insiders newsletter in Ft. Lauderdale, Fla., reports that its “flash index” of insider stock transactions has zoomed to 90%. That means that, in the 30 days ended Nov. 9, nine insiders were buyers of their companies’ shares for every one seller. The 90% reading surpassed the previous record 89% reached one month after the 1987 stock market crash, the last time insiders viewed their stocks as incredible bargains. . . .
Cheap seats for sale: A membership “seat” on the New York Stock Exchange fetched $265,000 in a sale last week. That was down $18,000 from the last sale Oct. 18 and was the lowest since Nov. 8, 1982, when a seat sold for $260,000. If the market were to follow depressed NYSE seat values, the Dow would be headed from 2,550 now to 1,050, its level in November, 1982.
