Footstar FTAR
October 05, 2009 - 6:13am EST by
2009 2010
Price: 0.76 EPS $0.00 $0.00
Shares Out. (in M): 22 P/E 0.0x 0.0x
Market Cap (in $M): 16 P/FCF 0.0x 0.0x
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 16 TEV/EBIT 0.0x 0.0x

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Footstar (FTAR) final liquidation - the soles aren't completely worn out yet  FTAR is in the final stages of an orderly liquidation process and no longer operates as a going concern. This stock is not exciting but represents a very low-risk investment, trading below its probable liquidation value. I estimate conservative liquidation proceeds of ~$0.94, a 19% premium to today's price, with a free option on higher proceeds. I expect part of the proceeds to be distributed in the next 6 months and the full distribution to occur within 12-18 months. It is an illiquid stock although from time to time blocks are available.

Company background/history FTAR was the major operator of licensed footwear departments in the US between 1961 and 2008. FTAR no longer operates as a going concern and is being wound down. FTAR has been written up before on VIC and it is worth reading these write-ups to learn more about the company background and the early stages of the liquidation. Since the background is not particularly relevant to the final liquidation stage, I will not delve into greater detail here.

Probable liquidation value

Estimated liquidation value - Balance Sheet July 4 2009             
    Base case Low case High case
Assets Book Adjustment Liquidation Adjustment Liquidation Adjustment Liquidation
Cash and cash equivalents 27.2 100% 27.2 100% 27.2 100% 27.2
Receivables  0 100% 0 100% 0 100% 0.0
Prepaid expenses - cash collaterized letters of credit 5.5 100% 5.5 100% 5.5 100% 5.5
Prepaid expenses - other prepaids 0.3 0% 0 0% 0 100% 0.3
Real estate - Mahwah, NJ HQ land and building 6.2 150% 9.3 100% 6.2 175% 10.9
Other 0.2 100% 0.2 0% 0 100% 0.2
Total Assets 39.4   42.2   38.9   44.1
Accounts payable 0.1 100% 0.1 100% 0.1 100% 0.1
Accrued expenses 7.4 90% 6.7 100% 7.4 75% 5.6
Income tax payable 0.4 100% 0.4 100% 0.4 100% 0.4
Long-term liabilities - NJ property mortgage 1.3 100% 1.3 100% 1.3 100% 1.3
Long-term liabilities - other 5.9 90% 5.3 100% 5.9 75% 4.4
Total Assets 15.1   13.8   15.1   11.8
Value 24.3   28.4   23.8   32.3
Other adjustments              
September 10 dividend (40c per share) (8.6)   (8.6)   (8.6)   (8.6)
Interest income 0.3   0.3   0.3   0.3
Liquidation value 16.0   20.1   15.5   24.0
Diluted shares (M) 21.5   21.5   21.5   21.5
Liquidation value  per share ($) 0.74   0.94   0.72   1.12
Implied return     19%   -5%   32%
Share price 0.76   0.76   0.76   0.76

FTAR common stock is a low-risk liquidation investment with minimal downside. As is typical in such liquidations, I believe management lowballed its net realizable value estimates. The key swing factors that will determine the final proceeds are as follows:

Real estate: FTAR owns a building and 21 acres of land in Mahwah, New Jersey. This real estate is currently listed by Colliers for an unrealistic $19.5M and has been on the market for nearly 2 years. I spoke to two brokers who know the property. They said that 'the seller should be able to comfortably get $10-12M' and to date there have been a 'couple of unacceptable offers'. There is likely upside here to management's lowball estimate of $6.2M although the time it will take to sell the property is a key issue.

Accrued expenses: There remains $7.4M in accrued expenses to manage the liquidation process. This consists of compensation costs, professional fees, G&A and building costs. I expect the complete liquidation to take 12-18 months. The $7.4M is well padded to manage the liquidation process even for an unlikely scenario in which management would take the entire three years to wind down the Company. It is in management's best interest to pad the accrued liquidation expenses to ensure they do not fall short, suggesting that the recorded liability is likely overstated.

Prepaid expenses: Prepaid expenses are effectively restricted cash in the form of standby letters of credit to manage potential obligations primarily associated with duties related to merchandise imports. Cash will be refunded to the Company as the letters of credit are reduced, terminated or expired. I believe this cash will become unrestricted in the next 6-12 months.

Other long-term liabilities: Management wants to ensure it is sufficiently covered to meet both expected and unexpected duties related to workers compensation, potential lawsuits, etc. As the company no longer operates, such items would primarily relate to prior events. I have limited insight as to the percentage of these liabilities that might be extinguished but I believe there is potential upside here and see this as a free option.

Other investment considerations

Management/Couchman: On December 9, 2008, the Board formally appointed Mr. Couchman as its Chief Wind-Down Officer. Couchman's employment contract runs until December 8, 2009 although it will surely be extended until the liquidation is complete (the contract is terminable on 30 day notice). Couchman earns a salary ($42K per month) to wind down the Company. There is therefore a risk that he drags this out to maximize his own compensation.  However, Couchman's decision to continuously return capital, including a 40c dividend in September 2009, suggests that he will likely complete the liquidation in an orderly manner without any surprises. He also owns ~5% of the stock.

Timing: I expect the liquidation to be complete in 12-18 months. The main obstacle to a final liquidation is the sale of the real estate. Even if the final wind down is unexpectedly delayed, shareholders will likely receive additional distribution/s in the next 6-12 months.

NOLs: FTAR has a significant amount of NOLs. At this stage, I believe no value will be extracted from these NOLs. However, if any reader believes otherwise, please let me know.





Building sale

Patience through the final wind down

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