|Shares Out. (in M):||10||P/E||8.0x||8.0x|
|Market Cap (in M):||65||P/FCF||9.8x||9.8x|
|Net Debt (in M):||2||EBIT||13||0|
Investment Rationale: Valued at 65m, DFZ operates a low CapEx model which generates significant free cash flow and trades for 8x earnings, 7x cash flow, has a 10% free cash flow yield, contains 35.1m of cash on the BS with 2.4m in debt, and has recently instituted a 20c yearly dividend (3.4%) along with a special 25c dividend. The stock apparently trades where it does due to persistent fears over management's stated goal of growing by acquisitions and associated worries over the CEO's ambitions (and pay).
There are several previous write-ups on slipper company DFZ (RG Barry) so I won't repeat that detail here, but suffice it to say the company has transformed itself into an asset play which generates significant cash flow which continues to build each year.
Here are some charms:
*Financial strength. Mar 09 BS shows 35.1m in cash (32 net) compared to the current market cap of 65m. 12m shareholders equity was up 8m, which most of that change going into cash.
*Modest top line growth. 9m sales were up 5% with net income down 19.6%. Hower, the company blames part of the margin compression on inflation from orders locked-up last year which, per company statements, should reverse itself next year. The company also suggests there is room for futher SGA improvement (precious few details) and SGA expense did grow slower than sales in the 9m. Company thinks that orders will be higher again next year.
*Decent FCF yield on a market cap basis. FCF on a trailing basis, using 8.2 and 1.6 trailing, equals 6.6 or a FCF yield of 10% on market value. Actual cash flow (sans working capital changes) is higher due to NOLs which will expire next year.
*limited liquidity. Stock trades very few shares.
*New ventures haven't apparently fared so well. DFZ has several ventures beyond the core slipper line - Nautica, Superga, Terrasoles, etc. - and none of them appear to be adding any profits to the company (my take). A recent license with levi's appears promising at first blush but so have most of these things and nothing has come of it.
*Management hasn't been overly inspiring with regards to shareholder value. Company is not open to buyback discussions, has turned down a friendly takeover offer at a few bucks higher, and generally sat on their hands as cash built (not always such a bad thing). The dividend payments, while nice, only represent a cash outlay of 5m in a year and the regular dividend is only equal to 2.2m.
*A dumb acquisition possiblity. Management wants to find a wonderful acquisition to grow the company, especially in areas outside the retail Q4, and has suggested they would lever to do so. Nothing has come of this yet, and meanwhile the stock has languished at these levels as management appears indifferent to the value presented by their own stock.
*Customer Concentration. WMT and JCP were almost 50% of business last year and definitely more this year most likely.
I just think this is cheap. With 32m net cash, there is limited downside unless there is a self-inflicted wound, and maybe sales are up modestly next year with both GM and SGA improvements and even more cash on the BS. And even if they make an acquisition, there is a chance it might even be a good one.
You've got me - maybe the lack of a stupid acquisition and continued growth in the cash levels as in two years the stock could have 47m in net cash on a market cap of 66m. Somebody will eventually notice.
|Entry||05/08/2009 12:02 AM|
We've owned this for some time - has always been cheap. Just hard to get over the fact that these guys are more in love with a big monthly paycheck (both the executives and the BOD - way overpaid!) and building some type of slipper empire than they are about doing anything about increasing shareholder value. No insiders buying shares to speak of over the past few years even when it was cheaper than this. No stock buybacks - wouldn't want to make a illiquid stock illiquid.... People had to beg and plead for them to do something with that hord of cash - at least they are giving us a tax effective return of cash although not significant enough.
I just don't know what the catalyst is anymore. This is a perfect candidate to be taken private and the best I can say is that they turned down a crappy offer and they haven't done a takeunder yet. Hopefully yet isn't the key word.
This thing is dirt cheap - I just don't know what they'll ever do about that for us poor saps that have a hard time selling a cash flow machine that trades around 2.5 EV/EBITDA. Here's to hoping there is a catalyst out there somewhere........
|Entry||05/08/2009 09:17 AM|
I feel your pain having agonized over this too. I just thought that, perhaps, the special dividend in particular might - might - represent something good since they left open the possibility of it being a regular event. At least, that's my hopeful interpretation. Agree that the actual size of the regular dividend leaves much to be desired.
And of course, there is always a possibility they they use that cash on something really horrible. I realize that this is a possibility and wanted to clearly note it on the write-up.
|Subject||RE: RE: Cheap|
|Entry||05/08/2009 10:28 AM|
I wrote up DFZ last year and it is one of my largest holdings. I'm very happy with management's "hoarding" of cash.
Look at it this way. Suppose a year ago they had sent a lot of their cash back to shareholders either as a special dividend or share buyback. There would be two consequences of that. 1) Companies like Walmart and JC Penny (their two biggest customes) would be a lot less likely to have SFZ as a category leader. The quality of balance sheets is one of the things they grade suppliers on. (2) We might now be arguing about DFZ's survival rather than the best use of cash.
I grade management upon how they run the business, not whether they are able to juice the stock. When you look at the performance of the company over the last few very difficult years, I am very satisfied
|Entry||05/10/2009 06:53 AM|
An encouraging sign that management will not settle for a mediocre acquisition comes from their recent earnings call: "We have been talking about acquisitions for the past 18 months and it may look like nothing is happening. However, our acquisition team is actually quite busy. We are seeing new opportunities at attractive multiples on a weekly basis and it would be very easy for us to make an acquisition very quickly. What is difficult is having the discipline to reach the 11th hour in the due diligence process, recognize that something isn't right for your business and walk away. That has happened to us more than once in the past 18 months and I would expect it to happen again. When we began this process we told you about our filter and making sure that when we invest our shareholders money that it would be in a venture which has a high probability of success".
An another note: One of the nice thngs about the Levi's project is that it gets their mens slippers into 250 Kohls stores. If they execute well, this could be a significant opportunity not yet priced into the shares.
|Subject||RE: RE: Author Exit Recommendation|
|Entry||11/23/2009 09:41 AM|
Well, to be frank I think the shares are still pretty cheap. At 9 bucks, trades for about 100m or 80m sans cash. The adjusted pe, sans that cash, is still in single digits. They do have, something not mentioned in the write-up, some issues with underfunded pension funding which will bleed off over time that were concerning, but the happy market so far this year should help there. I just felt that the valuation was now at a point where the company's stated goal of making acquisition actually has to work. Without it, this remains a mid single digit top line grower and as an asset play I thought the easy money was done. They could always buy something that does well for them to move this much higher than here.