View Idea

Stage Stores, Inc.(STGS) - $11.00 on Nov 19, 2001 by kurran363

			2010	2011
Price:	$11.00	EarningsPerShare:
Shares Outstanding (in M):	N/M	P/E:
Market Cap (in $M):	220	P/FCF:
Net Debt (in $M):	N/M	EBIT (in $M):	N/M	N/M
TEV (in $M):	N/M	TEV/EBIT:

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.

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.

Expand All

Collapse All

#	Author	Date	Subject	Private
17	stat820	09/23/02 03:48 PM	ROIC
Curious why STGS seems to have a much lower ROIC vs other similar retailers like Dress Barn?
16	hack731	08/23/02 11:14 AM	current price - $20.3
any thoughts on when to get involved again with STGS? Company missed June quarter by five cents but maintained EPS guidance for C02 ($2.58 to $2.60) and is doing a $15 mm stock repurchase (announced July 29; $6 mm completed to date).
15	pokey351	12/24/01 09:50 AM	Warrants??
Just noticed that certain Warrants are trading under the ticker STGSZ -- was wondering whether you have any information on these, whether they present some sort of opportunity, or whether they are essentially just a straightforward derivative play on the stock. Thanks.
14	kurran363	11/26/01 01:21 PM	Dilution
Options are struck at $13.75, $15, and $16.25 (spread evenly amongst). Warrants are at $15 and $20. At $15 and below, there is no dilution. Dilution only occurs as the options come into the money. So, yes there is dilution, but only if the stock goes up from here.
13	jay347	11/26/01 11:54 AM	Shares outstanding
Great idea. In the SEC filing the company lists shares outstanding as 19,973,000. From what I can tell, there is sizable future dillution of 5 million shares in the form of 3.5 million options and 1.5 million warrants. This reduces the value some; as does the run up in price.
12	kurran363	11/26/01 11:13 AM	Jeff
Inventory is now at normal levels, so there is no additional working capital usage other than normal seasonal variances. Obviously October/November is the biggest inventory build. The write-down of inventory did not affect the Pro Forma financials. It was just a lifo to fifo adjustment.
11	michael99	11/21/01 02:22 PM	wise creditors, 11 v 14
Looks like senior note holders get back to face value at a share price of around $21.62. How many are original holders, I don't know. Per a 13D filed yesterday, at least one creditor, surely a vulture (Third Point), has been buying stock in the open market from the get-go, rather than dumping. I figure the banks are the ones doing the dumping if any. The holders of scavenged debt obviously would not be dumping, at least not early. With the very good price performance of the stock, evidently share dumping price depression has not been a key feature of this emergence. My own target for STGS was the high teens, back when it was around ten and I was doing the analysis. I'd be a bit surprised (disclaimer: I'm often surprised by how far stocks can go up) if the stock maintains a level much higher than 20-21. 1.25X book, 8-9X eps is probably about right. The market just doesn't respect these types of operations, and generally with good reason (management, lack of real competitive advantage to give it supranormal ROIC, lack of organic growth engine). In any case, that's why I think at 11 it's a great idea (nearly 100% return) deserving of an 8, which I gave you, and at 14 (~50%) return a very good idea deserving of a 7 or so. At 14, the downside isn't any more significant than at 11, but the upside numbers change significantly. Mike
10	jeff175	11/20/01 07:52 PM	few more questions
what sort of cash do you expect to be utilized in working capital as they bring inventory up to a normalized level? "So they wrote down inventory and PP&E so they have $300mm of equity, pro forma." - has writing down inventory made the EBIT line look artificially high or does it have the potential to do such (if they wrote inventory down too much, there could be a one time benefit)
9	kurran363	11/20/01 06:25 PM	Michael
As I've noticed on other boards, your comments are value added. Management and the board is not an all-star list. One note, both the new CEO and CFO were former employees of predecessors of STGS, so they know the company very well. This may be good or bad, depending how you look at it. I think it's probably good. As for it being a great call at $11, thank you. Though, if I made this call when the stock was at $14, it would still be a great investment. $5/share in net cash. $2.60 in run-rate earnings = 5x earnings with NO debt. Given that the company only got it's inventory back to normal levels in November '00 after the bankrupcy filing, STGS probably was not at 100% of normal traffic for the first two quarters of this year. Assuming the economy does not deteriorate significantly from here (which may or may not happen), STGS probably has several more quarters of easy positive comps. Obviously, the margins on those additional sales is very large. Also, S,G&A was also probably higher in the first two quarters than it will be going forward. Compare the form 10 to the first two quarters. The four weeks of August seem to show a much lower run-rate for S,G&A than the first half of the year. If S,G&A comes down, as it seems to have for August, and comps increase modestly, STGS could make $3.00 next year. Also, STGS has an NOL of about $65mm. This will save them about $25mm next year. Free cash flow next year, should be about $80mm. That's another $4/share in cash. How many publicly traded retailers that make money trade for less than 10x earnings? I've found none. Most retailers with steady operations (not deteriorating badly) trade for 15x-20x earnings. Even at today's price of $14, at 5x earnings, with positive comps, no debt, and a huge cash position, this is still the cheapest public retailer I've even seen. It would be cheap at 10x earnings. IMO, downside at this price is still zero.
8	michael99	11/20/01 03:28 PM	a few issues
Not to detract from the value. At 11, the value needn't be carried out to decimal points before it hits you on the head. Nevertheless, the board of directors makes for a good hall of shame in retailing corporate governance. One guy from American Homestar. Another from EBSC (ok, now I need a shower). Another from KB. Then there are two academics. A consultant on the payroll. The new CEO and Chairman - I'm not familiar with the companies that he's led in the past. One of directors has close ties to the auditor. The CFO comes from Levitz. And then there's the treachery of the former CEO Mr. Tooker, detailed in the form 10. He's a FORMER, so no real impact on the current valuation. Just interesting. Again, you're right. At 11, a truly great investment you've found here. Mike
7	michael99	11/20/01 02:30 PM	kudos
Excellent idea. Only I wish you had held off a bit. I've been trying to buy the stock in size and was hoping it didn't get posted to VIC. I got some before the run-up, but would have liked to have a lot more. At 11, if it could be bought there (I only got a measly 10K shares), this truly was one of the best ideas this year. Great job (though I hate you just a little for it)! Mike
6	kurran363	11/20/01 11:20 AM	Answers
1) Almost all shares were held by equitized creditors. About 8 million shares have already traded so the process of changing ownership is well underway. 2)Largest players are listed on the Form 10. Oak Hill, Lerner Enterprises, Union Bank of Cal, Washington Mutual, Greenlight Capital. 3) About 45% of stock went to bank guys. Other 45% went to bond holders. and rest misc. 4) $300 of book value. Once the bankers determined a "fair value" for the company, they had to "fit" their assets to that number. So they wrote down inventory and PP&E so they have $300mm of equity, pro forma. 5) I cannot tell you if their loss assumptions for CC's are conservative, given the economy. BUT I can point out to you that in their monthly operating summary, filed while in bankruptcy, they show their reserves for credit card receivables. Reserves went from 4.7% of gross receivables at the time of the bankruptcy filing to 12.2% in August '01. My guess is that management has been overly conservative in it's estimates. 6) There is nothing unusual about STGS' accounting for it's credit card receivables. 7) Yes, some of the credit card receivables are part of the securitization. About $46mm by my calculation. Technically these are not free cash, but the remaining $35mm is. Given that STGS recently exited bankruptcy they were given onerous advance rates on their securitization. But in exchange for those advance rates, they only pay 30 day commercial paper rates. This is the best anybody can get. They did this because they don't need the extra liquidity of a lower advance rate. When they do, they can get a new facility with a better advance rate, and probably a higher interest rate. 8)They lease all of their stores 9) They expect to only have about $8mm of maintenance cap ex. per year. They plan to open about 5 new stores next year, and spend about $5mm. 10) My numbers assume fully taxed earnings. But they have about $65mm of NOL. Which will have them about $25mm in taxes. 11) Free cash flow should be about $85mm next year, after all cap ex. (since they won't pay taxes.)
5	ad188	11/20/01 10:08 AM	next in a long list of questio
A few things: 1) Do they own or lease? 2) What is the proportion of inventory to owner's equity? 3) What is the record of cash flow from ops and capex since emerging from ch11? 4) Are they paying taxes and is your pro-forma earnings estimate net of normalized taxes? Thanks, I think it looks like a great find.
4	gary9	11/19/01 10:12 PM	securitization, accounting, et
nice idea. for the accounting-challenged, would you please explain those things that "require much more explanation" in a nutshell. The securitization facility and A/R write-down, does anything trouble you here? Does it leave them under capitalized; will they have to draw the revolver in Q4? the funded credit card receivable asset, is it not part of the securitized pool? Is anything here non-standard as compared to most retailers' accounting? Thanks, CFA level zero
3	matt366	11/19/01 08:50 PM	2 more questions
After reading the Form 10: 1) The 300mm book based on fresh start accounting is grounded in 5.25 EBITDA & 0.375 sales multiples: Trailing? Hard to understand this math. Hear you on the typical understatement of fresh start, can you help on how it's applied here? 2) The retained interest (funded) in c card receivables: 80mm value is based on 4.5% loss rate & other payment assumptions, can you speak to the conservatism in these to justify the valuation. (Not sure how much it matters to the investment case).
2	matt366	11/19/01 08:19 PM	What's missing
Who are the sellers, other than the former bondholders? How were the claims handled under the plan, was there a lot of stock given to creditors high up in the capital structure? Also, Form 10 shows about 5mm share equivalents provided to insiders at $13-17 per share, which is interesting for a nunber of reasons.
1	bedrock346	11/19/01 02:06 PM	Who Controls This Thing
I remember this story from a high yield deal done 5-6 years ago. It is scary how fast operations deteriorated. I have absolutely no confidence in the operations. Who are the the guys running this company and how much overhang is there from equitized bondholders? Who are the largest players?