It’s Too Early To Bet On A New Day At The Bon-Ton Stores – The Bon-Ton Stores, Inc. (NASDAQ:BONT)

More importantly, less prevalent inventory markdowns allowed Dillard’s to post an uptick in its gross margin, up 30 basis points. The good news is that Bon-Ton Stores managed to generate a 0.6% increase in adjusted operating income in its latest fiscal quarter, thanks in part to an incremental improvement in its sales velocity, especially during the critical end-of-year holiday season. To learn more about it, click here.

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Summary

Department store retailer The Bon-Ton Stores wasn’t able to find profit growth in FY2014. The net result for Bon-Ton Stores was a need to incentivize customers with an increasing variety of promotions, a trend that led to a generally declining operating margin during that time period.

Bon-Ton Stores is certainly cheaper than it was a year ago, after a double-digit stock price decline in the ensuing time period that has left the company with an estimated forward P/E multiple around 12. The net result for the company was operating margin expansion and a 9.5% increase in adjusted operating income, a performance that has continued to fund stock repurchase activity and supported stock price gains in 2015.

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and smarter about their stocks. On that score, things are looking a little bit mixed at the current time. More notably, the company’s gross margin fell 40 basis points during the period, due to continued use of product discounts to move merchandise, as well as from the costs of offering free delivery to its growing band of online customers. The author has no business relationship with any company whose stock is mentioned in this article.

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Bon-Ton Stores is a niche player in the department store segment of the retail sector, operating a network of roughly 300 locations under a hodgepodge of regional brands, including Bon-Ton and Carson’s. The company was hurt by a continued use of heavy promotions to drive merchandise sales in FY2014, a negative trend that helped to produce a contraction in its operating margin, culminating in a 12.8% decrease in adjusted operating income. The company has spent the past five years struggling to find a formula that would engender consistent sales momentum, reporting positive comparable store sales growth in only three of those years. So, at current prices, is the company a good bet for investors?

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The bottom line

Given the prospective operating challenges at Bon-Ton Stores, investors should probably stick with an industry player that has been delivering better profit growth lately, like Dillard’s (NYSE: DDS). Combined with the higher overhead costs necessary to support its online sales initiatives, including a forthcoming dedicated distribution center, it added up to a reduced level of operating profitability for Bon-Ton Stores, helping to produce the aforementioned decline in adjusted operating income.

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. The company rode a solid holiday selling season to a 5.0% increase in total revenues in its latest fiscal quarter, including a 3% comparable store sales gain, due in part to favorable momentum for the apparel product category. The author is not receiving compensation for it (other than from Seeking Alpha). That being said, management’s profit forecast is predicated on an ability to deliver positive comparable store sales growth in the neighborhood of 2 to 3%, not exactly a slam dunk given Bon-Ton Stores’ inability to generate that level in any of the previous five fiscal years. However, the bad news is that management is forecasting the company’s sales momentum to moderate going forward, a trend that will likely put heightened pressure on its operating margin in the form of promotions and product discounting activity, potentially making profit growth a difficult goal to achieve in the near term.

Department store retailer The Bon-Ton Stores (NASDAQ: BONT) has not been a winner for investors over the past year, with shares down more than 30%. As such, there seems to be some uncertainty as to Bon-Ton Stores’ capability of delivering on its promise and investors might want to wait for some progress toward the goal prior to betting on this perennial underperformer.

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In FY2014, it was a relatively poor financial performance for Bon-Ton Stores, highlighted by a 0.4% top-line decline that was a function of minimal comparable store sales growth and the negative effect of one less operating week versus the prior year period. On the upside, though, Bon-Ton Stores reported a jump in sales momentum in its latest fiscal quarter, with a comparable store sales gain of 4.3%, which led to a better-than-expected profit performance, powering a subsequent stock price rally.

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The question for investors is whether Bon-Ton Stores can find its way to profit growth in the future, thereby providing support for a higher market valuation. The company was negatively impacted by a need to match the promotion-oriented mindset of industry competitors.

The company’s relatively weak financial performance led to a selloff in its stock price over the past year.

Despite a seemingly favorable forward P/E multiple of approximately 12, investors should probably wait for sustainable profit growth to materialize prior to taking the plunge with this regional player.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…)The author wrote this article themselves, and it expresses their own opinions

Amelia Woodward

Amelia Woodward

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