Tailored Brands, Inc. (NYSE:TLRD) shares are down more than -21.64% this year and recently decreased -2.15% or -$0.44 to settle at $20.02. Francesca’s Holdings Corporation (NASDAQ:FRAN), on the other hand, is down -62.34% year to date as of 12/14/2017. It currently trades at $6.79 and has returned 10.59% during the past week.
Tailored Brands, Inc. (NYSE:TLRD) and Francesca’s Holdings Corporation (NASDAQ:FRAN) are the two most active stocks in the Apparel Stores industry based on today’s trading volumes. The market is clearly enthusiastic about both these stocks, but which is the better investment? To answer this, we will compare the two companies based on the strength of their growth, profitability, risk, returns, valuation, analyst recommendations, and insider trends.
The ability to consistently grow earnings at a high compound rate is a defining characteristic of the best companies for long-term investment. Analysts expect TLRD to grow earnings at a 8.30% annual rate over the next 5 years. Comparatively, FRAN is expected to grow at a 10.00% annual rate. All else equal, FRAN’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Growth isn’t very attractive to investors if companies are sacrificing profitability and shareholder returns to achieve that growth. We will use EBITDA margin and Return on Investment (ROI), which control for differences in capital structure between the two companies, to measure profitability and return. EBITDA margin of 13.43% for Francesca’s Holdings Corporation (FRAN). TLRD’s ROI is 8.60% while FRAN has a ROI of 36.30%. The interpretation is that FRAN’s business generates a higher return on investment than TLRD’s.
If there’s one thing investors care more about than earnings, it’s cash flow. TLRD’s free cash flow (“FCF”) per share for the trailing twelve months was +1.64. Comparatively, FRAN’s free cash flow per share was -0.30. On a percent-of-sales basis, TLRD’s free cash flow was 2.39% while FRAN converted -0% of its revenues into cash flow. This means that, for a given level of sales, TLRD is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Analysts look at liquidity and leverage ratios to assess how easily a company can cover its liabilities. TLRD has a current ratio of 2.70 compared to 2.10 for FRAN. This means that TLRD can more easily cover its most immediate liabilities over the next twelve months.
TLRD trades at a forward P/E of 9.36, and a P/S of 0.30, compared to a forward P/E of 8.97, a P/B of 2.18, and a P/S of 0.55 for FRAN. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.
Analyst Price Targets and Opinions
Just because a stock is cheaper doesn’t mean there’s more value to be had. In order to assess value we need to compare the current price to where it’s likely to trade in the future. TLRD is currently priced at a 11.22% to its one-year price target of 18.00. Comparatively, FRAN is -17.7% relative to its price target of 8.25. This suggests that FRAN is the better investment over the next year.
The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 3.00 for TLRD and 2.80 for FRAN, which implies that analysts are more bullish on the outlook for TLRD.
Risk and Volatility
To gauge the market risk of a particular stock, investors use beta. Stocks with a beta above 1 are more volatile than the market as a whole. Conversely, a beta below 1 implies below average systematic risk. TLRD has a beta of 1.89 and FRAN’s beta is 0.28. FRAN’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Short interest, or the percentage of a stock’s tradable shares currently being shorted, is another metric investors use to get a pulse on sentiment.TLRD has a short ratio of 7.27 compared to a short interest of 3.48 for FRAN. This implies that the market is currently less bearish on the outlook for FRAN.
Francesca’s Holdings Corporation (NASDAQ:FRAN) beats Tailored Brands, Inc. (NYSE:TLRD) on a total of 9 of the 14 factors compared between the two stocks. FRAN has higher cash flow per share, is more profitable, generates a higher return on investment and has lower financial risk. FRAN is more undervalued relative to its price target. Finally, FRAN has better sentiment signals based on short interest.