Description

Investment Rationale:  Valued at 65m, DFZ operates a low CapEx model which generates significant free cash flow and trades for 8x earnings, 7x cash flow, has a 10% free cash flow yield, contains 35.1m of cash on the BS with 2.4m in debt, and has recently instituted a 20c yearly dividend (3.4%) along with a special 25c dividend.  The stock apparently trades where it does due to persistent fears over management's stated goal of growing by acquisitions and associated worries over the CEO's ambitions (and pay).

There are several previous write-ups on slipper company DFZ (RG Barry) so I won't repeat that detail here, but suffice it to say the company has transformed itself into an asset play which generates significant cash flow which continues to build each year. 

Here are some charms:

*Financial strength.  Mar 09 BS shows 35.1m in cash (32 net) compared to the current market cap of 65m.  12m shareholders equity was up 8m, which most of that change going into cash. 

*Modest top line growth.  9m sales were up 5% with net income down 19.6%.  Hower, the company blames part of the margin compression on inflation from orders locked-up last year which, per company statements, should reverse itself next year.  The company also suggests there is room for futher SGA improvement (precious few details) and SGA expense did grow slower than sales in the 9m.  Company thinks that orders will be higher again next year. 

*Decent FCF yield on a market cap basis.  FCF on a trailing basis, using 8.2 and 1.6 trailing, equals 6.6 or a FCF yield  of 10% on market value.   Actual cash flow (sans working capital changes) is higher due to NOLs which will expire next year. 

 Some problems:

*limited liquidity.  Stock trades very few shares.

*New ventures haven't apparently fared so well.  DFZ has several ventures beyond the core slipper line - Nautica, Superga, Terrasoles, etc. - and none of them appear to be adding any profits to the company (my take).  A recent license with levi's appears promising at first blush but so have most of these things and nothing has come of it.

*Management hasn't been overly inspiring with regards to shareholder value.    Company is not open to buyback discussions, has turned down a friendly takeover offer at a few bucks higher, and generally sat on their hands as cash built (not always such a bad thing).   The dividend payments, while nice, only represent a cash outlay of 5m in a year and the regular dividend is only equal to 2.2m. 

*A dumb acquisition possiblity.  Management wants to find a wonderful acquisition to grow the company, especially in areas outside the retail Q4, and has suggested they would lever to do so.   Nothing has come of this yet, and meanwhile the stock has languished at these levels as management appears indifferent to the value presented by their own stock. 

*Customer Concentration.  WMT and JCP were almost 50% of business last year and definitely more this year most likely.

I just think this is cheap.  With 32m net cash, there is limited downside unless there is a self-inflicted wound, and maybe sales are up modestly next year with both GM and SGA improvements and even more cash on the BS.   And even if they make an acquisition, there is a chance it might even be a good one. 

Catalyst

You've got me - maybe the lack of a stupid acquisition and continued growth in the cash levels as in two years the stock could have 47m in net cash on a market cap of 66m.  Somebody will eventually notice.