NEW YORK & CO INC NWY
September 05, 2014 - 5:01pm EST by
SpocksBrainX
2014 2015
Price: 3.30 EPS 5c $0.00
Shares Out. (in M): 63 P/E 67.8x 0.0x
Market Cap (in $M): 211 P/FCF 19.0x 0.0x
Net Debt (in $M): -64 EBIT 0 0
TEV ($): 147 TEV/EBIT 0.0x 0.0x

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  • Apparel
  • Negative Sentiment
  • NOLs
  • Retail

Description

52 week high/low :  2.93-5.97
 
NWY was written up previously by jwilliam903 at $5.53.  Unfortunately, the market is not interested in pretty balance sheet and positive cash flow stories and instead wants to throw dollars at potentially belly-up retailers like Wet Seal, Aeropostale, Pacific Sunwear, Delia's, Wet Seal, etc as detailed in a recent post from roark.  I am reposting this idea because despite the 40% drop in the share price, little else has changed.  
 
Thesis
I will refer you to the prior writeup for a discussion of the business, but this is essentially a no-moat, no growth apparel retailer with about 500 stores.  It features a strong balance and generates 20% of its EV in cash flow and has been beaten-down on short-term news.  If news continues to be solid, gravity will move it back higher. 
 
A list of positives and negatives:
 
Positives
*the BS remains very pretty.  Cash is appx $1 a share, or just under $65m.
*the company is profitable.  Trailing earnings equal $3m.  
*cash flow is large compared to either the cap or EV.  Depreciation is on track to equal 28m this year, so ni + da equals 31m.  On the cap, that's a ratio of 6.8x.    On EV, that's a ratio of 4.7x.
*1st half results were a-ok.  NWY managed to break even.  This compares to wretched results produced by many others. 
*the problems that have crushed the stock price seem short-term.  Frankly, as I don't have access to street research, I am left to my own devices to figure out why this stock has experienced a beat down.  My guess is that investors were none too pleased about the projected Q3 result I reproduce below:
 
 
  • Selling, general and administrative expenses are expected to increase approximately $4 million from last year reflecting increases in variable compensation expense, non-recurring duplicative rent associated with the relocation of the Company’s brand headquarters, increases associated with the Company’s fast growing eCommerce and Outlet businesses, and severance costs associated with executive transitions; and
  • Operating loss for the third quarter of fiscal year 2014 is expected to increase from last year’s operating loss of $3.1 million due to approximately $1 million of non-recurring duplicative rent expense and approximately $0.7 million severance charges.
 
While this does not qualify as good news, it is a one quarter issue.  The company said in the call that beyond Q3 they expected to resume leverage at their previously low single digit comp.
 
*the company has rationalized the store base.  Previously listed in the post before, NWY actually decided to rationalize its store base before they reached utter crisis territory.  For a retailer, this shows unusual intelligence (on an relative basis).
*the company does not engage in stupid shareholder value tricks like dividends or buybacks (so far).  Like CTRN's management, this company seems to realize that dividends and buybacks are for extremely healthy companies with a pattern of success and consistency and thus should be avoided by most intelligent retail managements.  This provides investors the necessary floor to enable any issue to be temporary rather than a life-altering event cause the company doesn't feel the need to put itself under threat and then have to turn to a dilutive offering to recapitalize.
*NOLs.  As of the last 10k, 252 in state and 47m federal.
 
 
Negatives
 
*this is not the greatest of business models.  Zero moat and relies entirely on execution.  Many won't invest for this reason, but it also creates extreme valuation ranges. 
*the CapEx budget is too high in 2014.  Trailing CapEx is 20m.  Projected CapEx for this year is 35-40m.  Like many retailers, the barest glimmer of success leads to HQ renovations and higher spending.   Unlike CTRN's CEO, this company seems to have this disease.  This is the biggest negative in the story but there is reason to believe with the spend this year and eventual slowdown in the outlet area (75 projected - almost there) and hopefully far less on HQ (14 this year) management will be rational again.  My guess is the cash balance got to their heads. 
*Heavy Insider Ownership.  Unlike many other retailers, NWY has a high insider ownership which I view as a HUGE negative as it precludes a rescue/buyout/rumor of same and thus means that NWY trades like a normal business instead of a bag of hope. 
*Pay is too much.  The CEO should not get more than 3m in salary when trailing net income is equivalent to this amount.  Top 5 officers got 7m which again seems outlandish to me in a no-moat retailer.  I think this explains why they needed to spend so much on the HQ.  Unfortunately, many believe this is a rational amount so it is simply a given and won't matter if the company puts up strong numbers.  Mr. Scott previously had a decent run elsewhere and has done a good job here.  Maybe he is worth it. 
 
Being blunt, this is a good idea in my opinion for a well-diversified portfolio.  I have owned these sorts of situations for many years and more often than not if you buy cash flow stories paying 20% of the EV things have a way or working out.  I also think this is a well-timed idea though clearly it could trade lower with any hint of negative news or if investors are surprised by the Q3 news already announced.  However, the reverse is true - it could jump with any decent news and the general tone of retail has noticeably improved in recent months.  Liquidity serves to exaggerate ups and downs.
 
 
 
 
I do not hold a position of employment, directorship, or consultancy with the issuer.
Neither I nor others I advise hold a material investment in the issuer's securities.

Catalyst

Investors attracted to retailers with good balance sheets and positive cash flow on the hint of good news.
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