Description

SSI is a small market department store chain, mostly in the South and Midwest, that is going through a transformation to an off-price retailer.  I have been following this company on and off for over 20 years.  I had forgotten about it for a while and assumed it was going bankrupt, like many other department stores.  They bought part of Gordmans (a Midwest retailer) out of bankruptcy in 2017.  I put it back on my radar then and kicked the tires a bit, but was skeptical. 

Then, I bought some of this when they announced in mid-September that comps had accelerated and that they were going to convert the whole chain by the end of 2020 to the off-price format, which I took as a strong signal that the conversions were working.

This morning’s announcement feels transformational to me.  They have now converted 89 of the 750+ stores.  The converted stores grew revenues 40% YoY and comps for the entire chain didn’t just accelerate from 2% last quarter, they blew the doors off with a 17% comp.

I need to keep this brief as I am traveling, but also want to get this out because I think it is timely. 

The simple headline here is that this is a $3 stock that just guided to about $1/share in adjused earnings in the 4^th quarter alone.  The guidance is a bit hidden.  You need to back into it, which is why I think the stock is not materially higher.

Bear in mind, this cannot be annualized as the 4^th quarter is seasonally strong and there is a bunch of debt too. This is not a risk-free idea, but the risk of bankruptcy seems to be off the table now and with the conversions much less of a unknown, I think the risk-reward is very favorable here.

On F2019, it doesn’t look especially cheap on an ebitda basis, but turnarounds often look expensive (or at least not cheap) in the early innings.  I have them doing at least $75M in ebitda in 2020 and trading to 8x which would be an $8.50 stock, almost a triple from here.  Last I looked, TJX traded at about an 11-12x multiple of ebitda.   

Here are just a few quotes from the call this morning:

“Comps sales were positive each month and improved sequentially each month”

“Inventory levels are actually down 3% versus a year ago.”

 "women's business began to gain traction in 2Q and womens delivered strong comparable sales in 3q"

"we are highly optimistic about the 4th quarter and beyond"

"alraedy seeing momentum in the 4th quarter"

"Inventory reflects our expectation of double-digit comps in the 4th quarter"

"Inventory will be reduced in 2020 by about $30M

"Full year 2019 cash flow will be poistive $35M, with a commensurate reduction in company debt.

Bear in mind, also, that the debt listed above is seasonally high at the end of 3Q and will drop by the end of 4Q. [Last year, debt dropped about $100M from 3Q to 4Q, so average net debt is significantly lower.  The key though is the $35M paydown they are now expecting, which is about $1.25/share].

Risks:

turnaround stalls

china tarrifs

recession/consumer spend decelerates

Catalyst

Strong comps

Successful conversion to off-proce

Amazon counter

Home and gift sales