Books-A-Million (BAMM) is the third largest bookstore chain in the US. It is still controlled by the founding Anderson family. In many ways BAMM has performed better than B&N or Borders but receives a lower valuation. The company is barely followed by investors, perhaps because it is headquartered in unfashionable Florence, Alabama and does not promote itself to Wall Street. The last conference call had no questioners. The hair on this idea is the significant related party transactions with the Andersons, but I think there is less to this than meets the eye. Between a recent $3 special dividend and on-going stock buy backs, the company is sending a lot of cash back to shareholders and is making its balance sheet more efficient.

 

There’s really nothing fancy in this idea; it’s just a good company managed for the long-haul that keeps getting a bit better every year. The price is right (EV/EBITDA < 5, P/E = 11, ROE 17%, Yield 3.3%). Unlike Borders and B&N, BAMM has been profitable for at least the past 10 years. In only one of those years has revenue declined (and that barely). There are 16 million diluted shares. The Anderson family controls 48% of the shares. BAMM bought back 179k, 405k, 229k shares in June, August, and October.

 

BAMM has 210 stores, 185 of which are superstores, with FY 2008 revenues of $550 million. The stores are concentrated in the southeast and midwest. BAMM recently announced their expansion into Pennsylvania and Nebraska. For FY 2009, BAMM plans a net increase of stores of 11-18, or 5-9%. This is an acceleration of growth from FY2008. They describe their real estate strategy as locating in upscale retail and lifestyle centers in medium and small urban areas, targeting well-educated customers of moderate- to above-average income. They have an e-commerce division. In addition to BAMM book sales, the e-commerce division controls online book sales for Wal-Mart, which should give some indication of the division’s competence.

 

Same Store Sales for Q3 were up 2.1%. For the first three quarters, they were up 2.8%. Last year’s diluted EPS were $1.12. However .09 of Q4 2007 after-tax EPS were due to gift card breakage income for periods prior to 2007, resulting from an estimate change. So let’s call last year’s Adjusted EPS $1.03. Almost 20% of their stores are in Florida and the real-estate bubble there might cause some issues, so I am assuming flat adjusted Q4 earnings of $0.80, resulting in 2008 earnings of $1.08.

 

While book sales can be heavily influenced by blockbuster releases (such as Harry Potter), these tend to affect industry sales as a whole, not market share. Participants can get whatever titles they need within a few days. Thus there is less risk than in some other parts of retail, such as apparel, where guessing wrong on denim can make or break you.

 

Here’s the comparisons to Barnes & Noble (BKS) and Borders (BGP)

 

 

 

It took me a while to gather information about the Anderson family. They keep a low profile. They own the Anderson Companies whose roots go back to a humble newspaper stand constructed in 1917 by 14-year-old Clyde W. Anderson, who had dropped out of school to support his family upon the death of his father. The companies now have revenues over $2 billion (excludes BAMM) and is #166 on the Forbes Largest Privately Held List. Anderson Media Corporation is the largest U.S. distributor and merchandiser of consumer magazines (which is where they are strongest), pre-recorded music, and books. TNT Fireworks is the country's largest importer and distributor of consumer fireworks. Anderson Press publishes children's books and houses Anderson units, Whitman Publishing and H.E. Harris, which sells books and supplies for coin and stamp collecting. They owned C.R. Gibson, which sells collecting books, such as photo and scrap albums, and was recently sold for $70 million. In 1980, the family purchased the 14-store Hibbett Sporting Goods chain, which began a rapid growth that culminated in the company going public on Oct. 16, 1996, and the family selling most of its interest. Charles Anderson was the first business leader in the U.S. to receive a personal invitation to trade with China in 1972 after President Nixon’s visit and was one of the first American businessmen to visit China since 1948.

 

When I first looked at the Related Party transactions, before I discovered the above, I was concerned that the related entities might be companies established to take advantage of the common ownership with BAMM. Once I discovered that they were leading companies in their own right, the arrangement seemed much more rational. In FY 2007, BAMM purchased $24.7 million of its magazines, seasonal music, and newspapers from Anderson Media. BAMM purchased $1.4 million of collectibles, gifts, and books from Anderson Press. There were additional, less consequential transactions also, relating to things like office and airplane expenses. I would prefer that these transactions did not occur but it’s not as if BAMM was dealing with a second-class operation. Also, it would not necessarily be in BAMM’s best interest to avoid dealing with the largest U.S. distributor and merchandiser of consumer magazines.

 

You can certainly argue that the valuation of BAMM should get a haircut based on the control by one family, although that same argument largely applies to BKS which is controlled by the Riggio family. BKS also has similar related party transactions with Riggio entities. I don’t see any substantial reason for the valuation gap between BAMM and BKS.

 

There’s no indication one way or another as to whether the Anderson family would be amenable to a take-over of BAMM or would want to take BAMM private.