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RG Barry Again
In March of 2005, we recommended the stock of RG Barry (dfz) trading then in the
over the counter market. With the passage of time, the old rgbc has turned around
and reasonably prospered with it’s stock advancing from a March 06, 2005 of
$3.80 to a current price of about $9.00. Honestly, we have our double and should
go home. But the story still is as attractive as before.
Let us first go back into history to review. Best known for its Dearfoam line of
slippers and Ezfeet at Walmart, RG Barry is one of the oldest shoe manufacturers
in the United Stares with about a 40% market share. Customers include JC Penney,
Federated, Macys among many others.
Enter globalization and sleepy Barry felt the hurt. Underpriced products started
hitting our shores, socking the domestic slipper industry. Results turned negative for
the company and then somewhat belatedly they searched for answers. The year 2004,
brought with it a turnaround expert and new ceo, Thomas Von Lehman . Within the next
two years, Von Lehman cut sku’s and high maintenance customers (big on unsold
shoes). Employees were slashed 90% as all production was moved to China. Customers
were dramatically reduced from about 800 to 30, with 13 customers accounting for about
65% of sales. All rather dramatic changes to right the ship. Commenting on earlier
results, Von Lehman said “….and our experiencing thus far with total outsourcing has
been better than expected from the standpoints of pricing, quality and delivery”.
In our earlier missive, we stated that DFZ estimated that over 75% of an estimated
62 million consumers had brand awareness of Dearfoams, a figure approaching 90%
among upper tier shoppers- now that’s brand power. And with little emphasisfrom adver-
tising and marketing!
Von Lehman having turned around the company gave over the reigns to Greg Tunney
past COO and PRES of Phoenix Footwear during 2006. Greg stated his mission now was
to grow the company both organically and by opening new channels of distribution.
Having been on board for last three quarters, results are showing up. For the quarter
ending Dec, revs were $40.9 million up 11% from comparable period while pro-forma
operating profits were $6.6 million up from $5.7 million. For the six months, revenues
were $78.3 million compared to $$72.2 million with proforma operating profits of
about $12.9 million compared to $10.3 million. Over the same time period (y/y), cash
vaulted to $14.8 million from $3.5 million, cash and receivables to $28.5 million
compared to $15.5 million with total current assets of $50.2 million ($36.6 million).
Current liabilities fell to $12.8 million from year earlier $15.3 million.
With an acid test of over 2 to 1 and current ratio of 4 to 1, it would be fair
to say Barry is in a good financial position. With cash mounting on balance sheet,
certainly one attractive use would be a buyback of shares and with only 10 million
shares outstanding it would prove nicely accretive.
The recent second quarter conference call was a veritable gold mine of informa-
tion. The CEO Greg Tunney said he believes that a realistic annual gross profit
percentage for the current business model was 40%. Again, the current model.
Selling and general administrative expenses were down by 16.6% for the quarter,
and a 13.2% for the first half. Inventories was reduced a dramatic 36%, or $6.9
million from one year ago. All good stuff.
The CEO went on to say that Barry was taking back market share, based he said
“on superior execution on every level”. Corporate strategy he went on to say would
include organic growth based on the introduction of new and licensed products and
their entrance in new and underserved channels of distribution – mostly new customers.
Examples would include key outdoor retail shops such as a local ski shop, specialty
shoe stores as well as full priced premium department stores. DFZ is looking at
licensing as well as other new accessory footwear areas. Sandals, athletic footwear,
slipper socks, are all new avenues of opportunity for company.
The exciting part of the story that Tunney shared on the call, was the introduction
of Terrasoles, a unique indoor-outdoor shoe- the first new product introduction under
the new business model. The major launch at two business shows in January was
“very impressive” with initial orders very strong at both shows. Terrasoles is targeted
to fill a void between the sneaker and slipper market- a shoe that is more comfortable
and casual than active footwear but is more functional than a slipper. It can be used for
travel, running errands and relaxing . Available for both sexes and retailing for $30 to
$50 thru full priced independent shoe stores, specialty shops, select premium department
stores in the Fall. Greg said this is their largest introduction of the year.
Adding another layer of excitement was the announcement of a line of clog shoes
called DF Sports that was introduced into Sam’s Club in late December. Management
said the first DF Sport product athletic mesh clog that experienced a 60% sell through.
Sales exceeded both the company’s and Sam’s Club expectations- very similar with
the Terrasoles launch. Quoting Tunney “The recent results we got from Sam’s Club
have just happened in the last four weeks and the results were, you know, short of
Now to the numbers. DFZ expects top line growth of about 7% for year end June
2007, about $112 million up from $105 million. They further gave guidance of a
an operating profit increasing at about a 30% rate over Dec 2005 which should translate
to $10.5 million up from $8 million in 2005. Using 10 million shares and a tax rate of
35% ( again no tax will be paid) gives us $0.69 up from $0.52. With a tax loss
carryfoward of about $25 million, profits should continue to buildup quickly on the
balance sheet. Little benefit will be seen from current product initiatives for year end
June. The new fiscal starting July should get RG Barry humming.
Our early line guess for the 2007-2008 year is $125 million with a pro-forma
operating profit of $14 million or a eps of $0.91 up 31% from the estimate for the
current June y/e. We believe the next 12 months could bring us a double for RG Barry.
Forays into sandals, licenses, branded shoes, outdoor segments and probability of a
growing cash bundle used to buyback stock or for a strategic acquisition all augur
well. Thus we are continuing to ride this horse.
Are you sure you want to close this position RG Barry?
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