Unpleasant Surprises Could Be In Store For Lands' End, Inc.'s (NASDAQ:LE) Shares

There wouldn't be many who think Lands' End, Inc.'s (NASDAQ:LE) price-to-sales (or "P/S") ratio of 0.2x is worth a mention when the median P/S for the Specialty Retail industry in the United States is similar at about 0.4x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

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See our latest analysis for Lands' End

What Does Lands' End's P/S Mean For Shareholders?

Lands' End hasn't been tracking well recently as its declining revenue compares poorly to other companies, which have seen some growth in their revenues on average. It might be that many expect the dour revenue performance to strengthen positively, which has kept the P/S from falling. You'd really hope so, otherwise you're paying a relatively elevated price for a company with this sort of growth profile.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Lands' End.

Is There Some Revenue Growth Forecasted For Lands' End?

There's an inherent assumption that a company should be matching the industry for P/S ratios like Lands' End's to be considered reasonable.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 7.6%. This means it has also seen a slide in revenue over the longer-term as revenue is down 17% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Shifting to the future, estimates from the dual analysts covering the company suggest revenue should grow by 3.5% over the next year. With the industry predicted to deliver 6.3% growth, the company is positioned for a weaker revenue result.

In light of this, it's curious that Lands' End's P/S sits in line with the majority of other companies. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as this level of revenue growth is likely to weigh down the shares eventually.

The Key Takeaway

Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

When you consider that Lands' End's revenue growth estimates are fairly muted compared to the broader industry, it's easy to see why we consider it unexpected to be trading at its current P/S ratio. When we see companies with a relatively weaker revenue outlook compared to the industry, we suspect the share price is at risk of declining, sending the moderate P/S lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Before you settle on your opinion, we've discovered 2 warning signs for Lands' End (1 is a bit unpleasant!) that you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.