FC estimates that the market size for performance skills training should grow from $7bn in 2007 to $8bn in 2008.  “FranklinCovey is engaged in the performance skills segment of the training industry.  Our competitive advantage in this highly fragmented industry stems from our fully integrated training curricula, measurement methodologies and implementation tool offerings to help individuals and organizations measurably improve their effectiveness.  This advantage allows FranklinCovey to deliver not only training to both corporations and individuals, but also to implement the training through the use of powerful behavior changing tools with the capability to then measure the impact of the delivered training and tools.

In fiscal 2007, we provided products and services to 90 percent of the Fortune 100 companies and more than 75 percent of the Fortune 500 companies.  We also provide products and services to a number of U.S. and foreign governmental agencies, including the U.S. Department of Defense, as well as numerous educational institutions.  We provide training curricula, measurement services and implementation tools internationally, either through directly operated offices, or through licensed providers.  On August 31, 2007, we had direct operations in Australia, Canada, Japan and the United Kingdom.  We also had licensed operations in 87 countries and licensed rights in more than 140 countries."

FC's Consumer Solutions Business Unit (CSBU) is being valued in the negative range of $2.5-6.50 per share, which does not make any sense.  CSBU does $145mn in annual revenue and EBITDA of $13mn ($9mm with corporate overhead included) with normalized CAPEX of $2-3mn. This business has 4 business lines: Wholesale (which has 40% ebitda margins and high margin revenue sharing), Internet/Catalog, Retail Stores, and recently released CRM Software business called Plan Plus which is growing double digits month over month off small base. It certainly has a positive value, realistically between 5-7x EBITDA or about .40x sls which would come to ~$3 per share. This values the Retail stores at less $0.86 per share or less than 6% of our $15 Target. The sum of the parts valuation is between $13-16 per share or for overall business 8x EV/EBITDA on '08E $13 per share. The retail stores continue to show solid profitability with the average store generating EBITDA of $53,000 which has improved every year since 2002 when the average store lost $6,000. This is due to closing stores that did not have attractive underlying demand, on average 12-15 stores a year are up for lease renewals and can continue to support only their best locations. One nice part of CSBU is the revenue sharing program with over 10,000 retailers including: Target, Walmart, Office Depot, Costco, and Sam's Club. Systemwide revenues for this wholesale channel have grown from $4mn to $60mn over the last 5 years and FC takes approximately 7.5% of the sale in royalties. Management has guided to being in 12,000 locations by August 2008.

Since 1990 (even through downturn of over expanding and selling off businesses) has averaged 13.8% EBITDA margins, and (excluding acquisitions) CAPEX has averaged 4% of revenue. However, this should change going forward where FC should be able to reach the mid teens EBITDA margins and CAPEX should drop to 2.5% of revenue. With an EV of $135 and poised to drop rapidly, the company is set to generated outstanding FCF over the next several years.

Fundamentally Covey has great brands, and while the distribution of the products has changed over time (from just paper planner to paper planner, software products, interactive online products) the underlying CSBU margins should hold with historic averages and Free Cash Flow dynamics should improve with reduced fixed costs. Over the last 10 years FC has had total sales well over $4 billion dollars. The business is in very stable shape given international growth, Client Partner sales growth (sales people booking go up to $1.5mn in the 5th year), new online/software products (Confidant, PlanPlus CRM,  7 Habits Interactive).

In comparing problems faced in 2002 recession with the state of the business today: In 2002 FC had: a) $420mn breakeven b) sold off non-core business c) in debt for $95mn with 10% after tax payments d) had over 200 retail stores that lost on average $6000 per year per store e) and was in survival mode. In 2008, FC has solidified the business: A) breakeven is $260mn b) has been highly focused and substantially improving the businesses they currently operate c) No debt and very low cost of captial d) Cut money losing stores from 200 to 80 and average profitablity is $53K per store e) Created revenue sharing agreeements with retailers where FC gets nearly 7.5% of sales from 10,000 retail locations growing 20% annually f) converted to more licensee's internationally (which creates a significant high margin royality stream that was very small in 2002).

The CEO is ethical, intellectually honest, and a very bright operator that has been successful in the business world. In his free time, Bob is a 7 time Iron Man Triathlete and on the Board of the Iron Man. Previous experience is CFO of Trammell Crow when he was 33 years old and the company had billions in debt which he helped restructure and was named CEO.  Thereafter he joined Private Equity firm Hampstead Group in Dallas from 1992-2000 and became Co-CEO and President. I can tell you from dealing with Bob for 2 years he really understands and thinks like an owner, he is very non-promotional and tells it as he sees it. He refused to hold quarterly conference calls for 5 years and just recently went back to quarterly conference calls. Here are Bob's comments on the situation: 

 NOVEMBER 2007

CEO: "We would love to buy shares, and in fact, slide 17 shows that over the past three years, we have actually taken $95 million of our cash and repurchased shares. Most of that has been preferred because we needed to be able to, under the restructure of the preferred, our rights to buy common were linked to the extent to which we actually repurchased the preferred, and we only had until December of this year to eliminate the preferred altogether." "...We have put ourselves in a position where we could, in fact, buy large amounts of common if we wanted to..." "...Through a combination of continuing to work on reducing assets to generate more cash, some transactions that perhaps can be done in the context of in the course of this year, our hope would be that we would be able to be aggressively in the market for our shares on some basis during the back half of the year (Mar ’08), if not before.”

CEO: “If the share price continues to not reflect what we think is real value, to purchase back -- either through just an authorization to buy in the market or through some bigger program, to try during the course of this year to raise the capital resources necessary, or to apply them to some version of something that would increase shareholder value. Whether that's stock repurchase or dividending or recap, there are a bunch of different things we're working on. But it's not a passive effort, I can tell you that, any more than these efforts that led to the ultimate repurchase of $95 million of securities were passive.”

CEO: “But I think one of the goals is, of course, to try to get the share price to the point where it can reflect the story, which I think the underlying story of which now is one that we are very happy to tell, growth story on one side and the restructuring side on the other. So I would anticipate that during the year, we will be having a public discussion of some kind about something that will affect shareholders.”

*CEO: “We're trying to work on both sides of the equation, which is having our operating income to sales -- our target is to get to 13% over the next two years, and at the same time to dramatically reduce the number of shares outstanding, if we can. If we can do those two things, the idea of having EBITDA and cash flow per share that's in the $2 and $3 is something that we think could be a realistic target.” (MARGIN EXPANSION: Growth in OSBU/Frachisee fees, Growth in Plan Plus CRM/7 Habits Online, taking $8-10mn out of OPEX)

Comments between CEO and an Analyst:

Analyst: "If I may say, I think it would behoove you to consider taking the story and starting to talk to the Street once again. I see no reason at this point why you would want to wait on this, actually.”

CEO: “I appreciate the advice on that. Would your advice be to do that before or after we buy a large block of shares?”

December 2007 Letter to Shareholders:

"We expect to increase our return on sales, on capital, and per share of common stock by continuing to improve our business models, optimizing the investment of our capital and human resources, and utilizing excess cash in a way which has the greatest opportunity for increasing shareholder value."