rszutu604 Posted April 18, 2011 Share Posted April 18, 2011 Symbol: BAMM (Nasdaq) Price: US$ 4.27 Market Cap: US$ 66 mil 52 week hi/lo: 4.03 – 8.43 Div yield (fwd): 4.7% Avg daily vol. (3 mo.): 42,200 Fiscal yr end: Jan 30 Summary BAMM stock is cheap based on TBV of $7.37 per share and private market value of ~$14 per share. PMV uses a 6.3x EV/EBITDA multiple but the stock is still cheap at an even more modest takeover multiples. Current EV/EBITDA is 2.2x. There is no liquidation value but the business does not appear to be in danger of disappearing in the short-medium term. Company Overview Books-A-Million (BAM) is a book retailer with 231 stores in the southeastern United States. The company was founded in 1917 and operates both superstores and traditional bookstores. Superstores (201 in total) range in size from 8,000 to 36, 000 square feet. Traditional stores (30) range in size from 2,000 to 7,000 square feet and are located primarily in enclosed malls. BAM has a growing online business but this accounts for only 5% of total revenue. A key part of the company’s strategy is to sell merchandise tailored to regional idiosyncrasies. The Anderson family, which are descendants of the company’ founder, own 52% of shares outstanding. The founder’s grandson, Clyde B. Anderson, is the current CEO. Recent Developments: Revenue has remained stable over the last five years. Same store sales are down 4.9% from a year ago, a trend that has persisted since 2005. The company compensated for lower store sales by increasing the number of stores to 231, from 205. Gross margins remain stable at about 30%. Operating margins have hovered in the 2-6% range and were 2.9% in FY2011. Valuation: For private market valuation, I used Roarke Capital’s takeover of Pet-Value Canada in July 2009 as the reference transaction because it had the lowest multiple of all transactions I tracked in the specialty retail industry at 6.3x EV/EBITDA. Those with higher multiples include Gander Mountain and Jo-Ann Stores, which were sold at EV/EBITDA multiples of 9.7x and 8.8x, respectively. Both companies were sold within the last 18 months. I used $34.4 mil as the normalized EBITDA for BAM, which is less than the $30 mil figure for FY2011. I applied the 10 yr EBITDA margin average of 6.9% to current revenue to arrive at normalized EBITDA. BAM has zero net debt. At 6.3x EV/EBITDA, the PMV of BAM is $217 mil or $14 per share. Even with a very modest takeover multiple of 4.0x EV/EBITDA, the intrinsic value of the stock is still 100% higher than the current price. On a historical basis, BAMM traded at an average of 15.7x P/E and 1.22x P/B since 1993. Current levels of 7.5x P/E and 0.6x P/B are low by comparison. Dividend yield is decent at 4.7%. BAM generates more than adequate EPS to cover the $0.05 quarterly dividend. EPS in 2011 was $0.57. Link to comment Share on other sites More sharing options...
beerbaron Posted April 18, 2011 Share Posted April 18, 2011 It's cheap for a reason. I researched a bit BAMM and passed. They are in a declining business that is attacked on all fronts. Prices and media supports are being eroded by online retailers that have huge scale advantages and the Kindle and etc... Also, I don't like that they are keeping opening stores. Why don't they just extract the cash from the business and close down the stores. So if you were to look at BAMM you should look at it as a runoff situation. Will the future cash flow exceed the current price? Will management give back to shareholders? BeerBaron Link to comment Share on other sites More sharing options...
Kraven Posted April 18, 2011 Share Posted April 18, 2011 Given the Andersons ownership interest as well as all of the related party transactions, there is zero incentive to let the business go into run off and just return cash. The incentive for them is to try and grow the business and that is clearly their intent. They've slowed down in the last year or so, but I suspect they will return to growth mode as soon as they can. I think it's also a mistake to use 10 year averages on this one. The business is clearly decaying. It might be overly optimistic to apply those higher averages. One interesting thing here that I've never seen mentioned. About a year ago they invested in an upstart yogurt chain called, of all things, Yogurt Mountain. The initial investment seemed a bit steep; was about $3 mil for a 40% stake in what was at the time a 1-2 shop business. Flash forward to today and if you include stores that are "coming soon" they have about 27 stores. They are self serve and their schtick is lots of choices that are healthier. Reviews seem very good. The biggest negative seems to be a bit of sticker shock. That once people get to the cash register with their cup it's a lot more expensive than they thought it would be. BAMM seems to be trying to integrate these stores into their own, perhaps alongside their already existing Joe Muggs concept. No financials at all are broken out and I have never seen any. Could be an interesting "hidden asset". Link to comment Share on other sites More sharing options...
bookie71 Posted April 18, 2011 Share Posted April 18, 2011 To see the trend you might want to look at Border's. Link to comment Share on other sites More sharing options...
onyx1 Posted April 18, 2011 Share Posted April 18, 2011 Two private jets, lots of related-party transactions, and a CEO who paid himself 12% of last years NI. The top four officers recieved 29% of the entire 2011 NI. Red-flags-a-million! These business-in-decline situations can be very compelling if (1) supported by a discount to tangible assets and (2) a management team who is hell bent on shareholder value. In this case (1) is a maybe, but (2) is not only a no, but I see management here is a liability to shareholders. Link to comment Share on other sites More sharing options...
rszutu604 Posted April 18, 2011 Author Share Posted April 18, 2011 Thanks for the quality insights everyone. Regarding declining revenues, I believe if sales drop another 10%, given the current # of stores, the company will be posting an operating loss. I don't know what the 'run off' value of BAM is but I believe the current market cap is less than the amount needed to replicate the business (buying inventory, advertising, hardware, etc). At such a low stock price, it makes more sense for a competitor to buyout the Andersons instead of competing against them. The management is making a huge gamble by continuing to open new stores. I wish they would buy back shares. You do have to trust them given the fact that they own half the shares. I wonder if the market previously considered BAM to be in declining business in late 2000/early 2001 when the stock traded at 6.0x P/E and 0.2x P/B - the stock subsequently quadrupled within five years. Link to comment Share on other sites More sharing options...
oddballstocks Posted April 19, 2011 Share Posted April 19, 2011 I think BAMM is a classic value trap, the stock is cheap on all metrics and that's what sucks in value investors. The problem is the macro landscape is changing, bookstores are falling by the wayside. The last time I was in a bookstore I noted how every single book I looked at was cheaper on Amazon. If the larger chains like Borders and B&N can't compete when they have economies of scale how will BAMM compete? For me to invest in BAMM it would probably have to be selling for less than liquidation value, where I could get a bad business for free as an option on some sort of last gasp of growth. Link to comment Share on other sites More sharing options...
DCG Posted April 19, 2011 Share Posted April 19, 2011 Why would anyone want to own a book store company? That's like buying a chain of CD stores. Link to comment Share on other sites More sharing options...
rszutu604 Posted April 22, 2011 Author Share Posted April 22, 2011 There's little downside in an investment in BAMM given the right price so I wouldn't avoid it at all costs. Even in a depressed business environment - where the past year had fewer blockbuster titles - BAMM generated about $16 mm of free cash flow ($30mm EBITDA - $10mm maintenance cap ex - $4mm tax). Over 20% of revenue now comes from food/beverage, gifts, toys, etc. Plus their online business is growing but still only 5% of total revenue. BAMM's business is unlikely to completely dry up suddenly as management has been adapting to the changing retail landscape. If you take three year's of FCF and net cash and investments of $4mm you get $52mm (or $3.30/sh). This is assuming no residual liquidation value from the rest of the balance sheet. Link to comment Share on other sites More sharing options...
beerbaron Posted August 5, 2011 Share Posted August 5, 2011 Trading at 50% of BV now which is probably their liquidation value. Anybody interested in a crappy business for free? BeerBaron Link to comment Share on other sites More sharing options...
DCG Posted August 5, 2011 Share Posted August 5, 2011 Nope. Their Future business is most likely worthy as much as Borders - nothing. Link to comment Share on other sites More sharing options...
nodnub Posted August 5, 2011 Share Posted August 5, 2011 Trading at 50% of BV now which is probably their liquidation value. Anybody interested in a crappy business for free? BeerBaron Total Assets are $273m but Inventory is $200m of that. What would this kind of inventory sell at in a liquidation? Perhaps a lot less than expected. Link to comment Share on other sites More sharing options...
Kraven Posted August 5, 2011 Share Posted August 5, 2011 Trading at 50% of BV now which is probably their liquidation value. Anybody interested in a crappy business for free? BeerBaron Total Assets are $273m but Inventory is $200m of that. What would this kind of inventory sell at in a liquidation? Perhaps a lot less than expected. My recollection from the last time I looked at them was that 80% of their inventory could be returned to the publishers for a full refund. My understanding is that is common for booksellers. So they are only at risk for up to 20% of the inventory. Not all of the inventory is books, but it is presumably the majority of it although they do sell other things as well. Further note: I just looked it up and this is what they say: "In general, more than 80% of our inventory may be returned to the vendors for credit, which substantially reduces our risk of inventory obsolescence." The question is, of course, whether "credit" means full credit or something less than that. In any case, the fact that they add that it "substantially reduces" their inventory risk would say to me it's more than 50% at the very least, but that is up for interpretation. I assume one could get a complete answer on this from the company. Link to comment Share on other sites More sharing options...
nodnub Posted August 5, 2011 Share Posted August 5, 2011 thanks for the details Kraven. you raise an interesting point regarding full credit vs. partial credit. Link to comment Share on other sites More sharing options...
rszutu604 Posted August 8, 2011 Author Share Posted August 8, 2011 I don't think a comparison to Borders is fair. Borders did not have a regional focus like BAMM. You can see the effect in the profitability figures. Borders' was bleeding cash and it had declining margins. For example, gross margins were 16% in its last full fiscal year down from 23% three years ago. Borders last broke even four years ago with GM of 26%. BAMM on the other hand has consistently had 29-30% gross margin, even now in a highly adverse business environment, while still generating free cash flow. BAMM has also picked up some select prime locations from Borders. Management is changing the business mix to include more electronic products as well as drinks, snacks, toys, etc. Not all of the yr over yr decline in revenue is due to secular headwinds. Temporary factors include a lack of major blockbuster titles and store traffic declines due to weather (tornadoes). The inventory isn't weak thanks to the returnability to vendors. The stock is below net current asset value of $3.40. Link to comment Share on other sites More sharing options...
Kraven Posted August 8, 2011 Share Posted August 8, 2011 BAMM has also picked up some select prime locations from Borders. You might want to double check this. I thought I read that their bid wasn't accepted and they dropped it. Link to comment Share on other sites More sharing options...
rszutu604 Posted August 8, 2011 Author Share Posted August 8, 2011 Their initial bid was dropped but I think they just went to the landlords directly. Some samples below. BAMM replaced Borders in Concord, North Carolina: http://www.bizjournals.com/charlotte/news/2011/08/03/books-a-million-replaces-borders-in.html In Erie, PA: http://www.worldmarketmedia.com/market-summary-1876/9015957-books-a-million-to-replace-borders-in-erie-pa.aspx In Huntington, West Virginia: http://www.herald-dispatch.com/news/briefs/x1974072314/Books-A-Million-to-replace-Borders Bridgeport, West Virginia: http://wboy.com/story.cfm?storyid=101456&func=viewstory In Dubuque, Iowa: http://www.kcrg.com/news/dubuque/Books-A-Million-to-Replace-Dubuque-Borders-Store-126136313.html Link to comment Share on other sites More sharing options...
Kraven Posted December 29, 2011 Share Posted December 29, 2011 Somebody named Harsha Gowda of Blue Shore Capital took a 6.38% stake here. Anyone know anything about Gowda and/or Blue Shore? Link to comment Share on other sites More sharing options...
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