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Reading through Dress Barn’s (Nasdaq:DBRN) first quarter conference call transcript, I noticed that it’s planning to open Justice stores in Canada next spring, Maurice’s in the fall of 2011 or the spring of 2012 and Dress Barn shortly thereafter. It’s a great move in my opinion, as Canada could be a lucrative new market for them. American retailers like Limited Brands (NYSE:LTD), True Religion (Nasdaq:TRLG) and Genesco (NYSE:GCO) crossed the border in recent months and plenty more will follow. One of Dress Barn’s competitors, Aeropostale (NYSE:ARO), opened its first Canadian store in August 2007. It now has 55 stores here heading into the big Christmas season. Dress Barn has its work cut out for it if it wants to catch up. While both are expanding, we’ll look at which one is the better stock.

Growth
In the most recent quarter ended October 30, Aeropostale’s same-store sales were flat. Dress Barn’s same-store sales increased by 4%, thanks in large part to the performance of its Justice stores, which are up 8% year-over-year. Dress Barn bought the chain last November for $157 million in stock. So far, the diversification looks to be paying off. Justice caters to tweens (ages 7 to 14), the same target as P.S. From Aeropostale. I don’t think Justice needs to worry about its newest competitor. It has 891 stores to 44 for the Aeropostale concept. On a sales per square foot basis, Aeropostale shines brightly at $624 compared to $172 for Dress Barn. Sales growth isn’t nearly as important when you’re generating significant four-wall contributions.

Profitability
In the last five years, Dress Barn’s operating margin has averaged 9% compared to 13.2% for Aeropostale. However, Dress Barn’s appears to be improving thanks to Justice. In its first quarter, its overall operating margin increased 150 basis points to 10.9%. Although it’s still much lower than Aeropostale, it’s at least headed in the right direction. In fiscal 2010, the two companies’ total revenues were within $150 million of each other, yet Aeropostale’s net income was $229 million, $96 million higher than Dress Barn. In terms of profitability, there is no comparison.  

Financial Health
At first glance, it appears Dress Barn is in a dead heat with Aeropostale. Dress Barn’s current ratio is 1.99 and Aeropostale’s is 2.29. Aeropostale has $255 million in current debt and Dress Barn $359 million. In terms of cash, Dress Barn has $326 million and Aeropostale has $297 million. They are virtually identical until you look at inventory turns and the number of days it takes to take care of the payables. On both counts, Dress Barn is not nearly as efficient. Aeropostale turns its inventory twice as many times during a given year and this leads to it making payments twice as fast as its competitor. Cash moves much faster at Aeropostale and that’s always a good sign of financial health.  

Valuation      
In July, I wrote an article about screening for retailers by multiplying a company’s PEG ratio, a valuation metric often used for growth stocks, with the price-to-book ratio, which is often used for value stocks. Only those stocks whose combined score was between 0.25 and 2.00 were eligible. The five lowest were Shoe Carnival (Nasdaq:SCVL), Stage Stores (NYSE:SSI), Stein Mart (Nasdaq:SMRT), Genesco (NYSE:GCO) and Collective Brands (NYSE:PSS). In the four months since, the five stocks achieved an average return of 26%, 15% better than the S&P 500. Given such a wonderful performance, I thought I’d do the same for Aeropostale and Dress Barn. Aeropostale’s combined score is 3.5 to 1.7 for Dress Barn. End of story, right? Wrong. Aeropostale’s score is artificially high due to $584 million in share repurchases in the last five years. Add those back in and Aeropostale’s book value per share almost doubles from $5.32 to $9.39. Its revised score is 2.0, barely higher than Dress Barn’s score. I’ll call it a draw.     

Bottom Line
Aeropostale is clearly more profitable. Both aren’t overly expensive right now. However, Dress Barn’s imminent move into Canada has me intrigued. If you’re looking for a sure thing, go with Aeropostale. If you’re looking for a surprise hit, go with Dress Barn. (To learn more, see Analyzing Retail Stocks.)

Regards,

Don