Description

I have found a truly great value investment. Stage Stores (STGS).

Stage Stores (STGS) operates discount clothing stores in the south and southwest. Roughly 80% of their stores are in Texas, Louisiana, and Oklahoma. 60% of STGS' stores are in towns of 50,000 people or less, where STGS is the largest (or only) major clothing retailer in town. The remaining are in somewhat larger, more competitive markets. The company filed for bankruptcy about 18 months ago following a period of aggressive acquisitions and store growth, financed with debt. The company grew from roughly 200 to nearly 700 stores over a short period of time. This pace of unit growth led to operating difficulties, which in turn led to financial issues, and then to bankruptcy. During Chapter 11, the company appointed a new CEO and CFO and closed half of the stores -- they currently have 342 stores. STGS emerged from Chapter 11 in late August, trading on the pink sheets.

The 10-Q’s that were filed for first and second quarters, while STGS was in bankruptcy, were extremely misleading. Due to accounting items related to several bankruptcy issues, results were dramatically understated. Of particular note, the “amortization of the premium paid for credit card receivables” was particularly misleading and dramatically understated actual results (this requires much more explanation.) The company filed a Form 10 at the end of October to get listed on the NASDAQ. The Form 10 contained pro forma data, normalizing the convoluted data in the recent 10-Q’s, for the first 30 weeks of the year. Pro forma earnings for the period were $1.37, equating to an annualized $2.40. Giving effect to normal seasonality (since the fourth quarter is obviously the biggest quarter), run-rate EPS is about $2.60.

Thus, STGS is trading at 4.2x run-rate earnings.

With 20 million shares outstanding, and trading at about $11, the company’s market cap is $220 million. The company has no debt and has $30 million in cash and another $80 million in funded credit card receivables. Like a credit card company, STGS can use it's excess cash balances to fund receivables, so they are effectively cash (treatment of credit card receivables also requires much more explanation.) Book value is $15 per share, or $300mm. Current book value was the result of mark-downs from historical costs, as a result of fresh start accounting. Thus, current book value is below historical cost and is very solid. The company reported $53 million in pro forma EBITDA the first 30 weeks of the year. Full year EBITDA then should be $90-$100 million.

Thus, STGS is trading at about 1.1x EBITDA (counting funded credit card receivables as cash)

Emerging from bankruptcy, the company has large positive comps ahead of it -- on November 8, 2001 the company announced 3Q same store sales were up +8.8% versus (4.4%) the year prior. The company is debt-free, cash flow positive, and has about $5 per share in cash and funded credit card receivables.

A conservative multiple of 10x-12x forward earnings yields a $26-$31 share price target. Listing on the NASDAQ should serve as a catalyst to drive shares higher. The stock should get its listing by the end of the year.

Catalyst

Listing on the NASDAQ at year end will greatly increase STGS' visability. The company's earnings will also be the catalyst. The third quarter will be the first earnings report since exiting bankruptcy. Large positive comps will act as a catalyst as well.