BIRKS GROUP INC BGI
November 04, 2013 - 11:33pm EST by
otto695
2013 2014
Price: 1.68 EPS $0.00 $0.00
Shares Out. (in M): 17 P/E 0.0x 0.0x
Market Cap (in M): 28 P/FCF 0.0x 0.0x
Net Debt (in M): 96 EBIT 0 0
TEV: 124 TEV/EBIT 0.0x 0.0x

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  • Personal Account Idea
  • Micro Cap
  • Jewelry
  • Turnaround
 

Description

Note: given limited liquidity, this idea is likely only suitable for small funds and PAs


Summary:

BGI is an obscure microcap luxury jewlery retailer with approximately $300M in revenues in Canada and the US whose new CEO has initiated a turnaround plan over the past 18 months.  The turnaround appears to be gaining traction in recent quarters, but there is significant additional potential should the turnaround continue, the initial improvement has been barely recognized by the market and the stock is trading at a significant discount to peer ZLC on similarly depressed earnings.

 

New CEO came on board 4/1/2012

The new CEO, Jean-Christophe Bedos, appears to be very credible, having overseen the expansion of the European jewlery store chain Boucheron between 2004-2011, along with significant experience at Cartier and degrees from the LSE and the Sorbonne.

 

Turnaround plan has two objectives:

1) renovate and remodel the existing store base over the next three years, including the relocation of some stores with an aim toward attracting a younger clientele and;

2) expand-- especially in China, with the first store opening in China in early 2014 as well as introducing additional "mono-line" stores in North America.

 

Here is a link to an article that discusses the plan in a bit more detail:

http://www.thestar.com/business/2013/10/07/birks_undergoes_image_makeover_en_route_to_china.html

 

The opportunity is to improve sales per square foot to drive ebitda and free cash and, ultimately to delever the balance sheet.

This is a reasonably levered situation, so if the plan is successful, the stock will likely be a multi-bagger over the next 2-3 years.

 

 

Recent Trends Positive and Accelerating:

Here are the comp store sales over the past 5 quarters (BGI is on a March year-end):

1H2013: +3%;

2H 2013: +5%;

1Q2014 (June quarter) comps accelerated to +9% (September quarter comps not yet released)

 

Other signs that point in a positive direction, for at least the near-term:

1. Controlling shareholder, Montrovest, likely privy to more information than others, converted its debenture into common shares in August at $1.70/share despite having over 2 years left to do so.

2. With earnings for 1H 2014 and 1H comp store sales likely to be released in the next few weeks (BGI reports earnings only semi-annually), the company's CEO gave a presentation today (11/4) entitled "Birks: The Return!"  Hard to imagine he would give such an exurberantly entitled presentation (complete with exclamation point!) if recent trends and near-term outlook weren't confirming the continued turnaround.

3. Comp store sales from ZLC and SIG continue to be solid though the September quarter, in the mid-single digit range.

 


Valuation & margin opportunity:

debt: $94M (adjusted for 8/2013 financing)

equity valuation: $28M (adjusted for 8/2013 financing)

TEV: $124M

3/31/2013 Actual EBITDA: $15.3M;  TEV/EBITDA: 8.1x

3/31/14 estimated EBITDA: $21.3M; TEV/EBITDA: 5.8x

3/31/15 estimated EBITDA: $27.7M; TEV/EBITDA: 4.5x

I believe BGI can expand EBITDA to $21M in F2014 and $28m in F2015 assuming the new store remodels drive a 6% comp, which is below the recent trend of 9%.

 

As a sanity check, this ebitda margin would only be 8.4% in F2015 (march year-end).  This seems very achievable (again if turnaround continues to unfold at a reasonable rate) when one notes 1) that SIG-- a competitor not in a turnaround-- has EBITDA margins of 16.9% and 2) the projections for ZLC's EBITDA margins are to reach the upper single digits within the next three years through its turnaround and 3) BGI's own EBITDA margins were as high as 9.1% in 2006. 

 

ZLC valuation: ZLC is trading at 14.7x  trailing EBITDA compared to 8.1x trailing for BGI.  While BGI certainly deserves a liquidity discount, the discrepancy seems too large, given that they are both in the early innings of their respective turnarounds....

 

Looked at another way, I could see BGI getting an 8x multiple of EBITDA on F2015 (remember this is not that far off given March year-end), within 12-18 months yielding a stock price of $7.70.  Even at a 6x multiple on F2015, the stock would be trading at $4.35.  And, this requires only a 6% comp, along with some allowance for new store sales, and modest overhead investment.

 

Catalysts:

Further evidence of turnaround's success

Improving financial results over the near/medium term

Greater awareness of the company/analyst coverage

If turnaround stalls, possible sale of the company

 

Risks:

Turnaround stalls

Consumer confidence

 

 

I do not hold a position of employment, directorship, or consultancy with the issuer.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

Catalysts:

Further evidence of turnaround's success

Improving financial results over the near/medium term

Greater awareness of the company/analyst coverage

If turnaround stalls, possible sale of the company

 

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    Description

    Note: given limited liquidity, this idea is likely only suitable for small funds and PAs


    Summary:

    BGI is an obscure microcap luxury jewlery retailer with approximately $300M in revenues in Canada and the US whose new CEO has initiated a turnaround plan over the past 18 months.  The turnaround appears to be gaining traction in recent quarters, but there is significant additional potential should the turnaround continue, the initial improvement has been barely recognized by the market and the stock is trading at a significant discount to peer ZLC on similarly depressed earnings.

     

    New CEO came on board 4/1/2012

    The new CEO, Jean-Christophe Bedos, appears to be very credible, having overseen the expansion of the European jewlery store chain Boucheron between 2004-2011, along with significant experience at Cartier and degrees from the LSE and the Sorbonne.

     

    Turnaround plan has two objectives:

    1) renovate and remodel the existing store base over the next three years, including the relocation of some stores with an aim toward attracting a younger clientele and;

    2) expand-- especially in China, with the first store opening in China in early 2014 as well as introducing additional "mono-line" stores in North America.

     

    Here is a link to an article that discusses the plan in a bit more detail:

    http://www.thestar.com/business/2013/10/07/birks_undergoes_image_makeover_en_route_to_china.html

     

    The opportunity is to improve sales per square foot to drive ebitda and free cash and, ultimately to delever the balance sheet.

    This is a reasonably levered situation, so if the plan is successful, the stock will likely be a multi-bagger over the next 2-3 years.

     

     

    Recent Trends Positive and Accelerating:

    Here are the comp store sales over the past 5 quarters (BGI is on a March year-end):

    1H2013: +3%;

    2H 2013: +5%;

    1Q2014 (June quarter) comps accelerated to +9% (September quarter comps not yet released)

     

    Other signs that point in a positive direction, for at least the near-term:

    1. Controlling shareholder, Montrovest, likely privy to more information than others, converted its debenture into common shares in August at $1.70/share despite having over 2 years left to do so.

    2. With earnings for 1H 2014 and 1H comp store sales likely to be released in the next few weeks (BGI reports earnings only semi-annually), the company's CEO gave a presentation today (11/4) entitled "Birks: The Return!"  Hard to imagine he would give such an exurberantly entitled presentation (complete with exclamation point!) if recent trends and near-term outlook weren't confirming the continued turnaround.

    3. Comp store sales from ZLC and SIG continue to be solid though the September quarter, in the mid-single digit range.

     


    Valuation & margin opportunity:

    debt: $94M (adjusted for 8/2013 financing)

    equity valuation: $28M (adjusted for 8/2013 financing)

    TEV: $124M

    3/31/2013 Actual EBITDA: $15.3M;  TEV/EBITDA: 8.1x

    3/31/14 estimated EBITDA: $21.3M; TEV/EBITDA: 5.8x

    3/31/15 estimated EBITDA: $27.7M; TEV/EBITDA: 4.5x

    I believe BGI can expand EBITDA to $21M in F2014 and $28m in F2015 assuming the new store remodels drive a 6% comp, which is below the recent trend of 9%.

     

    As a sanity check, this ebitda margin would only be 8.4% in F2015 (march year-end).  This seems very achievable (again if turnaround continues to unfold at a reasonable rate) when one notes 1) that SIG-- a competitor not in a turnaround-- has EBITDA margins of 16.9% and 2) the projections for ZLC's EBITDA margins are to reach the upper single digits within the next three years through its turnaround and 3) BGI's own EBITDA margins were as high as 9.1% in 2006. 

     

    ZLC valuation: ZLC is trading at 14.7x  trailing EBITDA compared to 8.1x trailing for BGI.  While BGI certainly deserves a liquidity discount, the discrepancy seems too large, given that they are both in the early innings of their respective turnarounds....

     

    Looked at another way, I could see BGI getting an 8x multiple of EBITDA on F2015 (remember this is not that far off given March year-end), within 12-18 months yielding a stock price of $7.70.  Even at a 6x multiple on F2015, the stock would be trading at $4.35.  And, this requires only a 6% comp, along with some allowance for new store sales, and modest overhead investment.

     

    Catalysts:

    Further evidence of turnaround's success

    Improving financial results over the near/medium term

    Greater awareness of the company/analyst coverage

    If turnaround stalls, possible sale of the company

     

    Risks:

    Turnaround stalls

    Consumer confidence

     

     

    I do not hold a position of employment, directorship, or consultancy with the issuer.
    I and/or others I advise hold a material investment in the issuer's securities.

    Catalyst

    Catalysts:

    Further evidence of turnaround's success

    Improving financial results over the near/medium term

    Greater awareness of the company/analyst coverage

    If turnaround stalls, possible sale of the company

     

    Messages


    Subjectquestion
    Entry11/05/2013 07:46 AM
    MemberWinBrun
    thanks for the write-up
     
    one question:
     
    why trust that they can successfully expand in China when they have had trouble managing a market in which they have operated for over 100 years?  What specifically gives you confidence that the brand and management team can deploy capital in China at high rates of return?
     
    thanks. 

    SubjectRE: question
    Entry11/05/2013 11:43 AM
    Memberotto695

    WinBrun,

    You are really banking on the new CEO here with respect to both 1) revitalizing the existing store base in North America and 2) expansion internationally, including china. 

    There are several things which give me some level of confidence that the risk/reward here is favorable, though it is not a slam-dunk:

    1) the new CEO has international experience, coming from a background with Boucheron-- a company which has many locations througout Asia, including China.  Here is  link to the Boucheron locations: http://us.boucheron.com/en_us/stores.html

    2) recent commentary about the company's new stores/remodels has been positive.  Unfortunately, the June conference call is no longer available, but there was positive commentary about their performance on that call. I cannot locate a transcript either.  However, there have been a few other "soft" offhand comments made regarding some of the remodels, such as in this link where the company notes that the first few new store concepts have had "great success":

    http://b2c.summit-tech.ca/media/misc/1376334026-new_financings_31july2013.pdf

     

    3) They are only opening one store in China right now (in Beijing).  If it fails, it is certainly a negative, but doesnt kill the company.  I think they will go relatively slowly to see how things go.

    Hope that helps....


    SubjectRE: RE: question
    Entry11/29/2013 09:27 AM
    Memberbdon99
    Otto695, thanks for the idea. I have a few questions:
     
    Curious if you have any interpretation of the recent results? Appears to be some positive trends in same store sales but some offestting negatives in margin.
     
    Noticed the re-evaluation of the China store location. What brand equity do these guys expect to have in China?
     
    Lastly, how might we best monitor this going forward given only the semi-annual reporting?

    SubjectRE: RE: RE: question
    Entry11/29/2013 09:54 AM
    Memberotto695
    Bdon, yes, a few thoughts:
     
    1.  I thought recent results were good, with another acceleration in comp store sales.  they are spending more to re-position the brand, which is to be expected.  But, with the new store formats performing well and the new lines of jewelry/watches also preforming well within all stores, we will eventually see margins turn back up.  In fact they hinted at this during the call when they said they expected significant improvement in profitability in future periods, including the second half of this fiscal year.
     
    2.  the brand equity they hope to have is two-fold:  i think they have a large % of asian customers who know the brand from travel in canada.  They get alot of Asian tourists in canada and apparently have a nice asian clientele that visit Birks in canada, who will then recognize the stores in China/Asia.  Second, internationally, Canada has a much more positive reputation than does the US, so i think they are hoping that a luxury jewelry brand can leverage off of that internationally in general including in Asia.
     
     
    3.  while they only release full results and have conf calls semiannually, they do report comp store sales quarterly.  (you can find prior years PRs on company website).  So, you will see a comp store sales PR sometime around February.  Admittedly, i'd love for them to do more and i think they will once the turnaround gains a little more traction.

    SubjectRE: RE: RE: RE: question
    Entry12/02/2013 04:45 PM
    Memberbdon99
    Thanks. One more for you: Do you know if there is a copy of "Birks: The Return!" presentation you mentioned floating around anywhere. I couldn't track it down.
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