March 20, 2009 - 11:45am EST by
2009 2010
Price: 0.30 EPS (.35) (.56)
Shares Out. (in M): 2 P/E NM NM
Market Cap (in $M): 1 P/FCF NM NM
Net Debt (in $M): 0 EBIT -1 -2

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Sport-Haley (SPOR), is a cigar but, but what a ridiculously cheap one it is. It has a viable business that is challenged by the market downturn, but its balance sheet is arguably strong enough to weather a sustained depression. The company currently trades for less than 10% of net current assets. The company has no debt, a current ratio of 5.9 and $.71 per share in cash.


We wrote up SPOR about five years ago when the stock was over $4 a share. The Company has faced management challenges over the last five years that have made it difficult to execute on its plan. We would recommend reading the old write up to get a perspective on the business. The positive news is that the old management is completely gone now and the new management has the right incentives to turn the Company around.


What attracted us again to this situation is what has occurred recently. Two of Sport-Haley's largest holders, Zeff Capital Partners (Spectrum Galaxy Fund) and Hillson Partners, have executed massive liquidations of their positions over the past few months.  Zeff has gone form a position of 540,000 shares or 24% of shares outstanding to zero. Hillson has gone from a position of 159,000 shares or 7% of shares outstanding to zero. These sales were done indiscriminately and in a panic. The shares price, predictably, was destroyed as it went from over $2 in October to less than $.20 in February. The bulk of the fund sales were done below $.30. Obviously, like many other funds, Zeff and Hillson had a massive need for liquidity. This is all well and good and explains the collapse in the share price, but what makes this situation interesting is who purchased the bulk of the shares. Donald Jewel, the company CEO, purchased over 340,000 shares and Company director Ronald Norick purchased 128,000 shares. Management has gone from an insignificant position in the shares to almost 40%. We believe this aligns management interest with ours.


Sport-Haley has a very simple business.  Sport Haley designs, purchases, contracts for the manufacture of, markets and distributes men's and women's fashion golf apparel and outerwear under the SPORT HALEY® and Ben Hogan® brands. SPORT HALEY® fashion apparel is comprised almost exclusively of women's garments and accessories. The SPORT HALEY® brand has been highly recognized within the premium and mid-priced fashion golf apparel markets for over 20 years. The Ben Hogan® label has been highly recognized within the golf apparel industry for the past seven years for continually providing elegant men's fashion golf apparel. Since its introduction in 2002, Ben Hogan® fashion apparel has been designed and sourced by Donald W. Jewell, who also serves as our Chief Executive Officer and President. In fiscal 2008 (June 2008), 48% of our net sales were comprised of Ben Hogan® fashion apparel, SPORT HALEY® fashion apparel garments and accessories accounted for 48% of our net sales and 1% of  net sales were comprised of Top-Flite® branded apparel which has been discontinued.


During the first six months of fiscal 2009, there has been a drastic difference in the performance of the Company's two main brands. Six month overall sales decreased 22%. Sales of SPORT HALEY® fashion apparel decreased 6% while sales of Ben Hogan® fashion apparel decreased 39%. The weakening market was clearly a significant cause of decreasing sales. Management believes the SPORT HALEY® brand may be better positioned to maintain market share in weak economic conditions than the Ben Hogan® brand, which is subject to greater competition within the country club and resort markets in which the Company primarily operates. Historically, the country club and resort markets have preferred to sell high-quality apparel that was not widely distributed within other retail markets. However, the broad market acceptance of major apparel brands such as Nike, Adidas and Under Armour, which are primarily comprised of performance fabrics and are globally distributed into numerous markets other than country clubs and resorts, appear to have diluted the value associated with the exclusivity of fashion apparel brands such as Ben Hogan®. The Company considers Ben Hogan® fashion apparel, which is marketed in accordance with a licensing agreement with Callaway, to be a key component of the Company's fashion apparel business, and has continued to focus marketing efforts on increasing market presence in upscale retail stores and on penetrating further into corporate markets. Over the past year, Ben Hogan® fashion apparel has been introduced to a few upscale retail stores and the Company has continued to search for ways to increase presence in the corporate market. Unfortunately, the Company has little to show for these efforts as sales to date have not been significant within either of these markets.


The loss for the latest three months was $142,000 or $.06 per share. The Company is doing an admirable job of cutting SG&A expenses to improve the bottom line. Until the economy begins to recover, the key will be for the Company to control costs and preserve its balance sheet. The Company's balance sheet remains in excellent shape with $1.6 million of cash, no debt, a current ratio of 5.9 and $9 million in equity.


The Company clearly has issues, but what are we paying for the option that the Company can resolve these issues and survive? The Company has 2.28 million shares outstanding. The Company also has 577,00 options outstanding with exercise prices of $2.71 to $3.60 per share which would be dilutive to book value and net current assets, but with the shares at $.30, I think it's reasonable to assume they will not be exercised and can be ignored for this discussion. The Company has net current assets of $3.87 per share, a book value of $3.94 per share and $.71 per share in cash. So the shares sell for about 8% of net current assets and book value and 42% of cash. Unless the Company is bankrupt, which it clearly is not, and management is delusional for buying such a huge block of shares, this cigar but looks like it has a few more puffs left in it!



1) Valuation

2) Management's recent purchase of huge blocks of shares

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