Description
Eddie Bauer – EBHI: $6.23
Caveat: I prefer a reduced level of downside risk than the EBHI balance sheet currently allows, however if we are right about the improvements to come in that balance sheet and in operating profitability, greater downside protection should develop.
A short interview with EBHI’s new CEO appears in today’s NYT business section.
Eddie Bauer (EBHI) is a potential 3-year triple, IF the new mgmt team can recapture the brand’s historical active outdoor legacy, and store productivity, thus ramping both revenue and margin performance. To be clear, EBHI is VERY EARLY in the turnaround; the new CEO started in June ’07, real merchandise change at retail can’t hit stores until fall/holiday ’08 and sourcing lead times push significant savings to ’09. Leverage is higher than I would like, so near term operating performance and cost/asset rationalization are important to create additional breathing room.
EBHI also has significant insider buying, a licensing/royalty business that generates $20M/year, a grossly underutilized distribution center worth $50-$100M and a $540M NOL.
Price:$6.51
Shares: 30.5M, 36M w/$13.55 convert, 38M incl. otm options
Mkt Cap: $190M
TEV: $545M, with $75M convert as debt.
EBITDA could triple from 2007E:$50M (5% on revs of $1.04B) to 2010:$150M (12% on revs of $1.25B) as improved retail and outlet stores sales performance leverages a more disciplined cost structure and also contributes to improved catalogue and on-line rev/margin performance. For perspective ’04 rev/EBITDA/margins were $1.16B/$142M/12.2%. Note: D&A running $50-55M/year so ’07 implies breakeven ebit.
At 7X ebitda, 80% of revs and about 16X eps:$1.30, EBHI would trade around $21 in 2010 vs. $6.23 today. (Assumes convert to shares given $13.55 cvt price) This valuation ignores an estimated $100M ($3/share) value for the DC & NOL (see below) and benefit of ‘09/’10 free cash flow.
Major shareholders (Wellington, DE Shaw, Trafelet, Third Point, JPMorgan, Fidelity) voted down a Sun Capital / Golden Gate Capital LBO at $9.25 (48% above current price) earlier this year. Yes, the financing markets have changed, but at least some reference point for valuation.
Retail Rebound Potential
Sales/sq. ft. have fallen to $250 from prior $400-$450 levels. Management explicitly targets a return to $450. At $400 sq.ft. incremental revs/ebitda would be $268M/$53-$66M at the likely 20%-25% incremental margins. Each $10 sq ft (4% comp on $250 base) adds $18M of retail revenue assuming 6500 sq ft /store and 275 retail stores. Note, retail currently accounts for about $475M of EBHI est. ’07 revs of $1,040M. Merchandising/sourcing initiatives successful enough to produce substantial retail lift, would likely also greatly benefit outlets, catalogue, internet and licensing/royalty income. Store productivity at $400/ sq.ft. would likely justify a store expansion program, but history/liquidity clearly dictate a prove it first posture
Insiders continue to buy – new CFO bought 22k in first 2 weeks since joining. In total 6 insiders have initiated or added to positions since mid-November totaling 50k shares. Chairman End, CEO Fiske and others also bought additional shares in August in the $8-9 range.
Recently announced a $25-30M cost cutting plan.
Monetization of an underutilized (owned) 2M sq. ft. distribution center could yield additional savings/cash proceeds. EBHI does need/want to retain internal distribution capability
Company/Brand abused and neglected during Spiegel ownership/bankruptcy. Eddie Bauer emerged from BK June’05. Prior CEO resigned Feb ’07. Board member was interim CEO until
June ’07. Miscellaneous post-BK noise mostly gone, although EBHI still has ownership change limits to protect $540M NOL (a/o ’06 10K). Annual usage may be limited to $35M/year.
Recent Q3 results offer signs of stability and a peek at upside potential, although prior year results made for easy comps. Retail comps rose 8.0%, while outlet comps fell 2.8% for an overall comp gain of 3.4%. Down and pant events were well-received and drove traffic w/o sacrificing margin. New merchandising programs at outlets are positively impacting results in recent months. Q2 showed retail/outlet/total comps or +4.6%/-4.5%/+0.9%, while Q1 total comps rose 9.5%. 2006 total comps by quarter were -10.0%, -5.9%, -1.5% and +4.6%. (Working on getting detailed quarterly comps).
New CEO, Neil Fiske, is well regarded and led impressive results as CEO at Bath and Body Works. Caveat: he did spend 14 years as a BCG consultant and co-authored a book, Trading Up (which I am reading now) about aspirational/luxury brands. Fisk’s own Eddie Bauer assessment upon taking the job: “Bauer was a brand that had drifted off it’s natural path for at least a decade and that really lost its identity and soul as brand. This is a real opportunity to get it back”. Fisk likes to cite, as models, the turnarounds achieved by Burberry, Coach and J.Crew. Outdoor category is vibrant as shown by Columbia and The North Face, with no truly dominant player.
Unique management incentive plan: CEO has 600K $13.50 strike options that vest 50% at $25 and 50% at $35! New execs have similar options structure (with lower strike).
New Senior Management team filling in with CFO, Marv Toland, from London Fog and Brooks Sports; General Counsel, Freya Brier, from Wild Oats; and SVP Sourcing/Supply Chain, Ronn Hall, from Coldwater Creek and Limited Brands and J Crew, all announced mid-November.
The current price is below post-BK BV of $9, although virtually all of this is represented by goodwill and trademarks.
Unknown: only debt/special sits boutique Imperial Capital even covers EBHI.
Leverage: higher than I would like at $355M net. $225M Sr Term Loan, $75M 5.25% 7-yr cvt (at $13.55) and $55M drawn on $150M revolver. Note: Sr trades recently 93-95, while Cvt is quoted recently 84-86, but not actively traded in some time. Management indicates co is “on track” to meeting covenants in critical Q4. As with most retailers Q3/Q4 is peak borrowing as inventory peaks prior to holiday selling season. Moody’s did downgrade the senior debt to B3 in Sept ’07.
Sourcing savings are also expected to contribute beginning in ’09. Management estimates 4-5% margin opportunity from sourcing initiatives. The prior in-house sourcing effort was largely gutted during bankruptcy.
Multiple channels to market with retail, outlets, direct (catalogue and internet) and licensing/royalties. Should allow better leverage of brand building, sourcing and merchandising initiatives. Most competitors are focused on retail, direct or wholesale channels.
Brand Repositioning: Return to Active Outdoor Lifestyle, Premium Brand. Athletically Dual Gender. Drifted to women’s & dress casual apparel under Spiegel ownership. In 1996 did $440 sq ft with 47%/32%/21% from Men’s/Women’s/Gear& Accessories, slipped by 2006 to $243 sq ft. with 40%/49%/11% contribution so lost 52% of Men’s and 70% of Gear/Accessories business on $/sq.ft. basis. Total retail $ decline was worse because also shut 20% of store base. (avg. store size flat at 6.6K).
Merchandising initiatives will really only meaningfully impact stores beginning in late ’08.
Target Customers are women/men 30-54 w/ avg. household income >$75K.
Corporate History/Legacy
Founded in 1920 by Eddie Bauer, first U.S. patented goose down jacket in 1936, outfitted 1st American to Summit Everest in 1963, bought by General Mills in 1971, bought by Spiegel in 1988, Spiegel BK March 2003, EBHI emerged from BK June 2005. # 4 outerwear brand in June ’07 survey (was #3 in ’06?).
Retail: 260 stores, target 5500 sq ft (60% +/- 15% of tgt) average about 6600.
Outlets: 121 stores
Website Re-launch in early ’08.
Catalogues: 80M circ.
Loyalty program started Sept ’06, pressuring margins in ’07, 2.4M customers enrolled.
Licensing/Royalty Revenue.
Own 30% of Eddie Bauer Japan (49 retail, 10 outlets, catalogue, internet) and 40% of Eddie Bauer Germany (now just catalogue, online and outlets). Licensees include American Recreation (camping gear), Cosco Management (car seats, strollers) and Ford Motor (Explorer/Expedition). In ’06 license and royalty income contributed over $20M of high margin revenue, while equity in foreign JV earnings was a marginal loss.
Catalysts: Multi-Year Brand Turnaround, Near Term Monetization of DC Asset Value, Q4 “Good Enough”, Cost Reduction Program Kicks in 2008.
DISCLOSURE: We and our affiliates are long Eddie Bauer (EBHI), and may buy additional shares or sell some or all of our shares, at any time. We have no obligation to inform anyone of any changes in our views of EBHI. This is not a recommendation to buy or sell shares.
Catalyst
Catalysts: Multi-Year Brand Turnaround, Near Term Monetization of DC Asset Value, Q4 “Good Enough”, Cost Reduction Program Kicks in 2008.