Can Plus-Sized Clothes Boost this Small Cap?

 | Sep 27, 2011 | 9:30 AM EDT
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One part of soft goods retail that never seems to work is plus-size fashion. The rap goes that more than half of American woman are a size 14 or greater and she has money to spend. The plus-size market is growing faster than the rest of the fashion industry, so it should be an attractive business.

Plus-size girls get ignored by the fashion industry and are an underserved market that seems ready to take off any day now. But the market never seems to get going.

Maybe things are changing, though. Last year, Saks Fifth Avenue (SKS) put out a press release that said it would begin to sell plus-size fashions from its most exclusive brands. There was disbelief in the industry that a brand like Chanel would go along with this plan to sell one plus-size outfit in the New York flagship store. Earlier this year, Chanel shocked fashionistas everywhere when they sent Kristen McMenamy, a 46-year-old model, down the runway for the 2011/12 Cruise show. Who ever thought that would happen? Maybe the plus-size plan isn't so farfetched after all. 

If the ice seems to be thawing at the top end for curvy gals, perhaps the day of the plus sized woman is about to arrive?  Charming Shoppes (CHRS) has been making this argument for years. With 1,952 stores and just under $2 billion in sales, Charming Shoppes is the plus-size authority. According to NPD Group, the plus-size apparel business is a $17.4 billion market and Charming Shoppes is No. 2 in the industry. In addition to fashion, the company is No. 3 in the $3.2 billion plus-size intimate apparel market.

Since the previous management team left the company abruptly, the new team has had to redouble its efforts to close unproductive stores, migrate from unprofitable malls to lifestyle strip centers and sharpen its focus on the more profitable Lane Bryant brand. In 2011, the company plans to close 240 stores and relocate as many as 13 Lane Bryant stores. In addition, the company has totally revamped its television advertising campaign and has begun to broadcast new ads.

Since bottoming out in 2008 at 1%, the company's adjusted EBITDA margins have been on the rebound. Margins are now near 6% and poised to reach 9% over the next two years. The company has also been taking advantage of low interest rates by refinancing debt and renewing credit lines on more favorable terms.

While apparel retail has always been a difficult business, Charming Shoppes has managed to increase sales 1% in the first half of the year compared with last year. Gross margins are up 150 basis points to 52.9% and expenses have been cut 4.4% to $501 million.

The plus-size market only makes up 17% of the women's apparel market since many retailers shy away from the business. Plus-sized clothing often carries lower margins since makers have to use wider bolts of cloth and specialized sewing machines and those extra costs that can be difficult to pass on to customers. In addition, plus-sized clothing often has to fit a wider variety of body shapes, so retailers often have to stock more of it than regular-sized apparel.

Last year, high-end designer Elie Tahari showed at Full-Figured Fashion Week, with more than 25 other designers. Perhaps the time has finally arrived for this high-risk small-cap company to grab the spotlight.

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