Description

COMPANY PROFILE:
RGB is the world's leading designer and maker of casual footwear. Slippers are marketed under brand names like Angel Threads, Dearfoams and Snugtreads. Lines are sold through department and specialty stores in the U.S. and Europe (RGB owns 80% of French slipper maker Margeot et Cie). The company also sells thermal retention products like Pizza delivery bags and heating pads. Wal-Mart accounts for over 20% of sales.
PRICE/VALUE:
With a market cap of $44mm, RGB stock price has double in the past year, but with less that 1/3 the price share per sales, it still offers plenty of room for gain.
RGB represents a combination of a value, a turnaround, and a growth play.
TURNAROUND:
It appears RGB has turned the corner on a 2-year operating decline beginning in 1999. 3Q 2001 reported a $.28 EPS with sales increasing 7% over 3Q year/year comparables. Management states that this included less close-out sales as gross margins improved 4.6%. Orders on hand suggest that even with an uncertain economic backdrop, that 4Q 2001 should be solid.
RGB is regaining lost market share from private labels. 2 years of restructuring which included changing from a manufacturing company to a product-oriented marketer, has improved operations, evidenced by improvements in inventory (24% decline in 1Q).
Margins are turning around sharply. Gross margins in the 2Q 2001 were 33.6%, up from a year earlier 26.4%
GROWTH:
R.G. Barry has been stagnant in growth, especially top line, for a decade. Wall Street may improve their interest if they see increased performance in any of the following developments.
1. Barry has just completed shipment to 550 additional mid and upper tier stores. Their newly won exclusive right to the Liz Claiborne license, has allowed this expansion. I doubt it will cannibalize any of the existing business.
2. Management states the thermal retention segment is in the final stages of a major contract with Papa John's Pizza. This segment is off to a slow start but shows promise and is looking for a JV partner.
3. A sleeper in my opinion is the 50 full-time employees in Barry's R&D department. Spending over $10mm a year for the past 3 years (a significant investment for a company of this size) has improved products - the thermal segment.
VALUE ESTIMATE:
In 1995-1997 RGB's return-on-equity was 12%; 14.6%; 15%. Returns achieved with little debt. RGB was and can return to an above average enterprise with a valuable market niche. Historical EV/EBITDA is 8X. A conservative value in 18 mo. with EBITDA estimated at $15.2mm and 6.5X (moving higher as ROE and growth improve) would be $99mm. With 9.4mm common shares outstanding, a share price of $10.50 would be reasonable. EV essentially is market cap, as the small LTD and cash cancel each other and there is no preferred stock issued.
Estimate 4Q 2002
Sales: $160mm 6.5% increase over 2001 est.
Gross Margin: 43.5% 3Q 2001 = 43.2% (cost 56.8%)
Operating Margin: 9.5% 3Q 2001 SG&A 33%
EBITDA = $15.2mm
RISK-REWARD:
Demand has not been an issue with RGB. With little debt and margins increasing, RGB appears undervalued at less than 1/3 price to sales. Add the likelihood of increased sales and the reward could be handsome. No investment is without concerns. RGB will have to oversee its transformation of outsourcing and improve its thermal-retention segment. The risk-reward ratio however appears to be more than satisfactory.

Catalyst

RGB is a combination value, turnaround, and growth play. With margins increasing and new products being introduced, this value issue has potential for a double.