Description

Blair is a $600 Million catalog retailer of fashion apparel selling for 82% of Net-Net (Current Assets minus all Liabilities), with a PE of 9, dividend yield of 2.9%, and low debt. It has better stock liquidity (more than 25k shares daily) than most Net-Nets.

Blair has been profitable each year since at least the mid 1980’s. Last year was a very bad year for them since they seem to have totally misjudged consumer tastes at the end of 2000 and early 2001. Their catalogs flopped. Blair spent the rest of 2001 recovering from this. They had to cut pricing and spend a lot more money advertising and sending out catalogs in order to clear out their inventory. Even including the disastrous 2001, their average EPS for the 5 years ending 2002E is $1.93. My point here is that Blair is a currently and historically profitable company selling below Net-Net. There is no cash burn issue here.

For the first 6 months of 2002, Blair earned $12.6 million vs $5.3 million in 2001 (EPS of $1.58 vs $0.66). The 2001 results included $4.1 million pretax income from a tax settlement, so the improvement is better than would appear at first glance. Value Line expects Blair to earn $2.30 per share this year. Obviously, this could be a lot higher or lower depending on the Christmas season, but it is nice to already have $1.58 in the bank. There are 8 million shares outstanding. Dividends have been stable at $0.60 per share for several years. Debt (all short term) is $15 million vs Shareholder Equity of $247 million. Including Operating and Capital Leases doesn’t change the debt picture very much. Current Assets are $275 million (Cash, A/R, and Inventory of $54, $146, and $57 million respectively). Total Liabilities are $77 Million, resulting in Net-Net of $198 Million ($25 per share).

Now that Blair has recovered from its mistake of early 2001, it has improved profitability by mailing fewer, but better-targeted catalogs. This has allowed Blair to reduce its delinquency rates and mailing costs, resulting in significantly higher profits even though it has given up some less profitable revenues. Advertising expense in the second quarter of 2002 decreased 24.5% from the second quarter of 2001. Reductions in advertising volume and paper costs were primarily responsible for the lower advertising cost in the second quarter of 2002. Sales through its web site have increased to 10% of revenues, which has also improved the cost structure.

Cash Flow from Operations for the first 6 months of 2002 was $56.6 Million vs. $13.4 Million in 2001. If you back out the impact of reduced Inventory and Accounts Payable since those can be manipulated, you get a 2002 Adjusted Cash Flow of $38.1 vs 2001 of $20.0 Million. Therefore it looks like the improvement was real. Return on Equity, at 8%, is low, but you can’t have everything in an investment.

Blair looks upon its credit granting (Blair Credit) as a marketing advantage. In the early 1990's, Blair started extending revolving credit to first-time (prospect) buyers. In the mid-1990’s credit quality declined and Blair tightened its credit granting procedures. Blair Credit customers, on average, buy more, buy more often and are more loyal than cash and credit card customers. Blair feels that the benefit from the increased sales volume achieved by offering Blair Credit is significant and more than outweighs the cost of the credit program. The detail the company provides to support this conclusion is in their SEC reports. If VIC members wish I can provide that detail in a follow-up posting.

The Provision for Doubtful Accounts declined by more than the decline in sales. This is normally a red flag. However, I don’t think management is being aggressive here for two reasons. (1) As a percentage of Doubtful Accounts, the Provision is unchanged from Q2 in the prior year. (2) The delinquency rate of open Accounts Receivable in June 2002 is 3% lower than the percentage a year earlier.

Merchandise inventory turnover has improved and was 2.9 at June 2002 compared to 2.4 at December 2001 and 2.4 at June 2001. Merchandise inventory as of June 2002 was 34% lower than at December 2001 and 49% lower than at June 2001. As mentioned, a year ago inventory was excessive. As we all know, in the fashion industry inventory depreciates fairly rapidly so decent inventory turnover is key to profitability.

Capital expenditures for property, plant and equipment totaled $5.8 million during the first six months of 2002 and $4.5 million during the first six months of 2001. Depreciation for the corresponding periods was $4.3 million and $3.9 million. Capital expenditures are projected to be approximately $41 million in total for the years 2002, 2003, and 2004. Approximately $21 million of the $41 million is attributable to a long term project to improve their fulfillment capabilities. Most of the $5.8 million in capital expenditures so far in 2002 are attributable to the fulfillment project.

Blair has a long-term issue since their core customer is over 65 (also: female, retired, low-middle income). Their new Crossing Pointe division, which now has an alliance with Jane Seymour, is part of their drive to appeal to older Baby Boomers. It remains to be seen how successful this will be.

Directors and Officers own 9% of the company. Most of the other major shareholders are institutions like Fidelity. Executive compensation is on the low side, with very few stock options granted.

To figure out what Blair is worth I looked at Dress Barn (DBRN), another apparel retailer that has a fairly high net-net. DBRN relies mostly on stores instead of catalogs. A few days ago it was selling at $11 per share with a Net-Net of more than $6 per share. DBRN’s cash balance is around $7 per share. EPS were $1.01. DBRN just announced a Dutch Auction at $15-$17 per share (P/E approximately 15-17). Incidentally Paul118 posted DBRN on VIC two years ago, when it was slightly above 10 (split adjusted). DBRN’s balance sheet is a bit more liquid than Blair’s but it was selling above Net-Net; Blair is selling below. I believe the similarities are enough to justify the use of the same P/E range, which would result in a valuation of 34 – 39. My gut tells me that is a bit on the high side, so I’d be looking for a valuation of around $30.

A comparable Dutch Auction by Blair would cost around $60 million. Blair does have the financial strength and existing credit lines to handle such a buy-back without much degradation of their balance sheet. I do not have any indication that Blair is contemplating such a move but Dress Barn’s move has to set them to thinking. In 1996-2000 Blair bought back over 1.6 million shares. Due to 2001’s lousy performance, they have not repurchased any shares for the past 18 months. I am using a target of 28-32 (lower than DBRN’s valuation) with very low risk due to Blair selling at less than Net-Net and having a secure, reasonable dividend yield.

Catalyst

possible Dutch Auction, similar to Dress Barn’s