Description

What is the best way to play JC Penny sales contraction? Why Bon-Ton of course.  I have no opinion on JC Penny’s ultimate survival other than; it lost over $4billion in sales last year and very little if any came BONT’s way even though they overlap in about 70% of their stores! BONT is a perennially overleveraged department store that makes most of its money in the 4-6 weeks around Christmas.  It is currently trading at just under 6x projected EBITDA of which 4.5x are represented by its Net Debt.  One multiple point of EBITDA improvement, represents about $10 per share or an almost doubling of the current share price.

The company is a hodge-podge of has-been retailers that were cobbled together in an attempt to get scale that was never really achieved.  EBITDA has been stuck around $170mm for the past 2 years but is projected to be just under $200mm this year.

Once upon a time, the company generated almost $300mm with essentially the same asset base.  It is worth noting that the company never missed a payment back in 2008 despite the bonds trading down to 10 cents on the dollar. Those bonds now trade at par, and they are coming due next year.  Management is trying to refinance them without issuing equity, but that fear has served as a cap on the share price.

The real story of BONT is one of management change. The new CEO, Brendan Hoffman, is young and well trained having come from Neiman Marcus and having helped turn –around Lord and Taylors.  He also cut his teeth and Bergdorf’s. He is low-key, smart merchant who has a firm grasp of Bon-Ton’s problems and no delusions of grandeur.   True, he did not spend time at the knee of Steve Jobs.  But he did pay his dues learning from some of the best apparel merchants in the business.

 He has all the right functional experience including the web. He knows what he doesn’t need to do (fire his customer ala JC Penny).  Last year was his first year and it was not great, but not a declining year. If there is any disappointment is that they were handled a golden opportunity from JCP Penny and dropped the ball.

I believe that the CEO was brought into turn the company around and then sell the company.  In the case where he actually gets EBITDA closer to $300mm and it trades for 6x, you could have a $50 stock, but I no longer believe in Santa or the Easter Bunny. I do believe in the frothiness of this high yield market and in this CEO so I do think $200mm of EBITDA and a 6x Multiple should get you close to a $20 stock and probably much higher on the refinancing news.

I have attached my equity table under a range of EBITDA multiples and scenarios below. To get to $20, you need about 6.2x $200mm in EBITDA (it is currently trading at about 5.5x that number):

Catalyst

Refinancing, sale of the company, general deleveraging (the company should pay down almost $2 of debt per share this year).