Retail long/short idea

Transcription

1 sholker [printed: August 29, :03 AM] [saved: August 29, :19 AM] C:\Documents and Settings\sholker\Desktop\Sholk\Presentation\Sholk Molecular Diagnostics Presentation Final.ppt Retail long/short idea I used the following slide deck in an idea generation presentation to fellow classmates in the Applied Security Analysis Program at UW-Madison Though I failed to fully develop this discount department store arbitrage idea, the slides outline one way I ve generated investment ideas

2 Retail L/S idea? Doug Bennett March 9, 2012

3 sholker [printed: August 29, :03 AM] [saved: August 29, :19 AM] C:\Documents and Settings\sholker\Desktop\Sholk\Presentation\Sholk Molecular Diagnostics Presentation Final.ppt Market misdirection screen Screen used to uncover consumer products & services enterprises exhibiting negative net income margins and unlevered operating cash flow yields > 20% o o Find potentially cheap, cash flow-positive companies whose earnings are obscured by non-cash charges sell-side and many mutual funds focus on P/NTM earnings multiples when analyzing the sector, especially the retail names Focus on consumer companies given successful 4-year track record generated with concentrated bets on primarily consumer companies Bloomberg Equity Screening (EQS <GO>) 2

4 Screen results sholker [printed: August 29, :03 AM] [saved: August 29, :19 AM] C:\Documents and Settings\sholker\Desktop\Sholk\Presentation\Sholk Molecular Diagnostics Presentation Final.ppt Wide gap between market value and enterprise value made Stein Mart jump out o Trades at 3.6x EV/EBITDA with ~1/3 of market capitalization in cash Bloomberg Equity Screening results 3

5 Closer study warranted sholker [printed: August 29, :03 AM] [saved: August 29, :19 AM] C:\Documents and Settings\sholker\Desktop\Sholk\Presentation\Sholk Molecular Diagnostics Presentation Final.ppt Balance sheet is a fortress but sales have fallen quickly since 2008 however, both analysts covering the stock believe EBITDA will stabilize in

6 sholker [printed: August 29, :03 AM] [saved: August 29, :19 AM] C:\Documents and Settings\sholker\Desktop\Sholk\Presentation\Sholk Molecular Diagnostics Presentation Final.ppt Similarities with JCPenney Both mature discount department stores focused on retailing apparel and home furnishings o Women s apparel & accessories: Stein Mart displays higher tilt o Men s apparel & accessories: comparable between companies o Home furnishings: Stein Mart has fallen from comparable 20% share in 2002 to 11% in

7 sholker [printed: August 29, :03 AM] [saved: August 29, :19 AM] C:\Documents and Settings\sholker\Desktop\Sholk\Presentation\Sholk Molecular Diagnostics Presentation Final.ppt Similarities with JCPenney Both are struggling to maintain relevance and compete with off-price and specialty retailers Department store market share down Source: JCPenney Company Presentation - Jan 15,

8 sholker [printed: August 29, :03 AM] [saved: August 29, :19 AM] C:\Documents and Settings\sholker\Desktop\Sholk\Presentation\Sholk Molecular Diagnostics Presentation Final.ppt Similarities with JCPenney Both have historically employed the same extreme discount pricing strategy Vendors 7

9 sholker [printed: August 29, :03 AM] [saved: August 29, :19 AM] C:\Documents and Settings\sholker\Desktop\Sholk\Presentation\Sholk Molecular Diagnostics Presentation Final.ppt Similarities with JCPenney And both have recently vowed to discontinue the discounting strategy to adopt everyday low pricing impress upon (the customer) that our everyday low prices are the best they re going to find. - Jay Stein, Chairman, Interim CEO, Nov. 17, 2011 rationalizing our sales promotions and becoming less reliant on coupons. - Greg Kleffner, CFO, Nov. 17,

10 sholker [printed: August 29, :03 AM] [saved: August 29, :19 AM] C:\Documents and Settings\sholker\Desktop\Sholk\Presentation\Sholk Molecular Diagnostics Presentation Final.ppt Similarities with JCPenney Both are experiencing extraordinary management changes : grows chain from 3 to 265 stores as CEO 2002: transitions to Chairman role Sept. 2011: steps in as interim CEO, begins search for full-time replacement Pre-2000: Senior Merchandiser -Target : SVP, Retail - Apple Jun. 2011: activist investor Bill Ackman lures to JCPenney with CEO role 9

11 Valuation gap sholker [printed: August 29, :03 AM] [saved: August 29, :19 AM] C:\Documents and Settings\sholker\Desktop\Sholk\Presentation\Sholk Molecular Diagnostics Presentation Final.ppt The companies appear to be so similar, one would expect to see valuation multiples in a close range In fact, JCPenney s assets are valued at 10.2x EBITDA vs. Stein Mart s at 3.4x Long/short opportunity? 10

12 Reasons for valuation gap sholker [printed: August 29, :03 AM] [saved: August 29, :19 AM] C:\Documents and Settings\sholker\Desktop\Sholk\Presentation\Sholk Molecular Diagnostics Presentation Final.ppt Affected by changes in sales to different degrees given wide gross margin gap Both intend to reduce operating expenditures related to constant couponing and signage changes, though the dual effect on future sales and operating costs are difficult to determine 11

13 Reasons for valuation gap sholker [printed: August 29, :03 AM] [saved: August 29, :19 AM] C:\Documents and Settings\sholker\Desktop\Sholk\Presentation\Sholk Molecular Diagnostics Presentation Final.ppt Apple-like hype surrounds new JCPenney CEO Ron Johnson and his ambitious turnaround plan 12

14 Reasons for valuation gap sholker [printed: August 29, :03 AM] [saved: August 29, :19 AM] C:\Documents and Settings\sholker\Desktop\Sholk\Presentation\Sholk Molecular Diagnostics Presentation Final.ppt Plan to transform traditional rack-filled 400-brand department store floor into 100 separate, curated shops (i.e. mini-specialty retail stores) $800m capex planned for 2012 (~100% of expected CFO) Believers forecast 2013 EPS of ~$5.00 (2yr forward P/E of 7.5x) 13

15 Reasons for valuation gap sholker [printed: August 29, :03 AM] [saved: August 29, :19 AM] C:\Documents and Settings\sholker\Desktop\Sholk\Presentation\Sholk Molecular Diagnostics Presentation Final.ppt New monthly color scheme feeds investor excitement Hype/nonsense - And frames frame the things we love. And we thought there was something powerful here, something that we could really develop and to use. 14

16 Reasons for valuation gap sholker [printed: August 29, :03 AM] [saved: August 29, :19 AM] C:\Documents and Settings\sholker\Desktop\Sholk\Presentation\Sholk Molecular Diagnostics Presentation Final.ppt Stein Mart exec bonuses have been triggered by hitting disparate, ever-changing goals EPS ( ) Debt pay down / cash build (2009) Operating income ( ) Short-term, cash bonus goals are different from long-term, equity-based bonus goals - risk of incongruence (i.e. 1-year EPS vs. 3-year Total Shareholder Return) Should use EVA or a normalized OCF/FCF target that better aligns management and shareholder incentives 15

17 sholker [printed: August 29, :03 AM] [saved: August 29, :19 AM] C:\Documents and Settings\sholker\Desktop\Sholk\Presentation\Sholk Molecular Diagnostics Presentation Final.ppt Reasons why valuation gap may close Similar stores, similar merchandising, similar pricing scheme Jay Stein highly motivated to save what he built and protect 35% ownership stake Stein Mart Home segment drops from 20% sales in 2003 to 11% in 2010, Jay Stein hires Macy s home furnishings exec to revive category Updating stores, updating technology Some probability they are able to hire a name-brand, successful retail builder as CEO Conclusion: No trade Long Stein Mart excellent return potential if a turnaround takes. Recent SSS growth figures flat to slightly negative, can t deduce if decline is secular and operating leverage a major risk Short JCPenney stock priced ok if the bull scenario has a decent probability of playing out, hard to assess Ron Johnson s magic factor, no precedents to judge likely success of shop transformation project, a bull market better for JCP than SMRT given higher gross margin 16