Description

Sport-Haley, is a designer and manufacturer of men and women’s golf clothes sold primarily through golf professional shops, country clubs and resorts. Sport Haley, more appropriately called, "Sport Hairy," has enough hair to scare, but should work out to be a decent investment.

Let’s get the hairy part out of the way first. Back in calendar year 2000, the company announced that it would restate its financial statements for the years 1998, 1999 and 2000. Subsequent to that, Nasdaq halted trading in July 2000 for non-compliance issues which have since been cleared-up. Interestingly, it wasn’t until just last month that a class action lawsuit was filed with regards to the restatements. Additionally, there is an ongoing formal SEC investigation. Add to the mix plummeting sales from $30.4M in 1998 to $21.7M in 2001, sprinkle in a little nepotism, reduced golf rounds played due to bad weather and a recession and you’ve got a stock which has skidded from the high teens to the low twos.

So what makes this White Owl smell like a Cohiba?

The balance sheet. New product introductions. Restructuring from domestic manufacturing to foreign outsourcing. Share buybacks. Potential buyout.

THE BALANCE SHEET 9/30/01: The balance sheet is pristine. No debt, under $1M in liabilities and $10.4M ($3.64/share) in cash. Add in another $12.1M ($4.25/share) in receivables and inventory and you’ve got a chunky discount to net current assets.

NEW PRODUCT INTRODUCTIONS, THE BEN HOGAN LINE: Although overall sales are still trending down, SPOR’s womens line increased by 5% year over year (women’s line accounted for 46% of total sales in ’01) and to re-engergize the men’s line they signed a licensing agreement with Spalding for the Ben Hogan apparel. The Ben Hogan line which debuts in January at the PGA Convention in Orlando will be a high end line. For those of you who know golf apparel, it will be equivalent in price and quality to the Bobby Jones apparel line. SPOR expects U.S. and Canada sales of the Ben Hogan line to reach $10M-$15M in 5 years. If successful, they can roll out the line internationally. Additionally, Spalding has the Top-Flight brand golf ball which Haley could develop a mid-price line for.

RESTRUCTURING: SPOR was the only publicly traded golf apparel company which was still manufacturing domestically. In fiscal 2000 SPOR manufactured 75% domestically at their owned and operated facility. In August, 2001 SPOR closed down this plant (which accounted for an $872,000 pre-tax write down. Additionally, in 2001 there was another $420,000 of expenses relating to the above mentioned audit restatements. These expenses are truley one time charges.)lobbing off 29% of its workforce and will now be outsourcing all product overseas. Recently gross profit margins have been in the 30% range versus competitors Cutter and Buck and Ashworth with margins in the high 30s and low 40s. So, with SPORs makeover to foreign outsourcing we can expect gross profit margin expansion going forward.


SHARE BUYBACKS: Within the last twelve months SPOR has purchased over 17% of all outstanding shares. Just today they announced another 400,000 share repurchase program or another 14% of the company.


POTENTIAL BUYOUT. The company has twice hired Donaldson, Lufkin & Jenrette to advise in “strategic alternatives,” in 1997 and then again in 1999. In both cases, nothing materialized, but in 1999 there was a non-binding letter of agreement for Sport Haley to be purchased in an undisclosed cash transaction which subsequently fell through. Mangament owns 13% (inclusive of 277,500 options granted at $3.00) and recently with the above actions have added substantial shareholder value. A sale of SPOR is not out of the realm of future possibilities.

What’s the value?

Assuming it takes three years to normalize margins (and any lost litigation is covered with their current D&O Insurance – which they have told me they have and feel adequately protected), 2002 sales dip to $16M and then rise 15% per year as the Hogan brand kicks in bringing sales back to $21M by year end 2004, the company buys in an additional 15% of shares, and the cash accrues at 2%. Using a 5 EBITDA multiple (plus the cash/share) I estimate a take-out sales price of $8.08. That’s a 37% return.

On a market value pricing model, again three years out with $21M in revenue, using a 6 PE on .29cents/share of after tax net income (3.5% net margin) from operations plus the accrued cash and share buybacks I estimate the stock price to hit $5.75. That’s still a 23% return.

Catalyst

The balance sheet. New product introductions. Restructuring from domestic manufacturing to foreign outsourcing. Share buybacks. Potential buyout.