If you're an executive at a struggling retailer, then you've
been warned. Either come up with a way to turn the ship around, or
get ready for investors to make life quite difficult. In this tough
economic climate, investors are in no mood to hold on to any retail
stock that is posting weak sales and profits. And that spells a
gloomy stock price -- often for an extended period.
Yet there is one crowd that is looking to
from these retailers' woes: Private-equity firms. These firms are
sitting on lots of cash and are starting to circle like vultures,
picking up distressed assets on the cheap. Indeed they've already
begun to pick off their prey, and I think there's a way for
investors to profit from all of this.
• At the end of May, Sycamore Partners announced plans to
buy clothing retailer
for $369 million.
of Talbot's rose 90% to $2.44 on the day the deal was
• Just last week (July 2), Aria Partners announced its
intention to acquire shares of
Christopher & Banks (NYSE:
, another clothing retailer, for $1.75 a share -- a roughly 50%
premium to the prior trading session's closing price.
In both instances, these retailers were none too pleased.
Talbots only agreed to be acquired after it became apparent that no
other suitors would come and top Sycamore Partners' seemingly
. Christopher & Banks issued a terse "no thanks" to Aria
Partners, though that may just be the initial tactic as the two
sides sit down to negotiate.
For the rest of us, this emerging trend bears watching. That's
because a number of retailers are trading at rock-bottom prices,
and if they languish much longer, then they may soon get their own
offers. As I've noted before, that's not an intrinsic reason to own
a stock, but it can be seen as one of several reasons to consider
Talbot's and Christopher & Banks emerged on the radars of
the private-equity firms after seeing their price-to-sales ratio
slip below 0.5. The charm of targeting retailers with such low
price-to-sales ratios is that, in theory, they are a lot closer to
their multi-year bottom than their multi-year top.
Here are three other retailers sporting rock-bottom valuations that
will likely either rebound on their own, or perhaps find themselves
the recipient of the next buyout offer.
1. Big Five Sporting Goods (Nasdaq:
Price-to-sales ratio: 0.19
This sporting goods retailer went public in 2003 at $9 and was
able to deliver solid growth in a rising
, which eventually pushed shares up to $25 by 2007. By then,
were handily exceeding $1 per share a year. Yet in the past few
years, economic headwinds have led sales growth to stall out, and
earnings fell to just $0.53 per share in 2011. Shares have since
slid all the way down to just $7.50.
Yet it's that price-to-sales ratio that shows how unloved this
stock is. Even mighty
, which is now the largest seller of sporting goods, yet has
struggled with growth, isn't this cheap. It has a price-to-sales
ratio that is almost three times higher.
2. MarineMax (NYSE:
Stop by any marina, and you'll hear the same tale of woe: Few
people are buying boats right now. It's what happens whenever the
economy slows. Yet whenever the economy rebounds, old boats go to
the scrap heap and buyers begin snapping up new boats once
That may be cold comfort for this boat seller. Sales hit $1.26
billion back in fiscal (September) 2007 but are now around $500
million. And its shares have fallen from more than $30 back in 2006
to a recent $9.50. Yet behind the scenes, this is a healthier
business than it might appear. Management has boosted sales of
services like repairs, spare parts, insurance and financing, all of
which carry robust profit margins. As a result, sales and profit
trends are improving, even as overall boat sales remain in a
That sets the stage for very solid results when the economy
improves, though private-equity firms may look to pounce long
before that happens. After all, these same folks are targeting
with a recent buyout offer, taking advantage of a cyclical business
that is on the down leg of the cycle.
3. Radio Shack (NYSE:
This electronics retailer has been a value trap. Shares fell
from around $20 in late 2010 to around $7 by this past winter, at
which time I figured Radio Shack's track record of prodigious
would provide solid support to shares. Unfortunately, management
subsequently announced that cash flow was beginning to slump, and
shares have fallen all the way to $4.
Radio Shack generated annual
of around $275 million a year, though Goldman Sachs now pegs that
figure at $150 million in the years ahead. Still, when you consider
that the entire company is valued at less than $400 million, you
realize that price equity could afford to pay four times projected
EBITDA -- and still provide a 50% premium to the current share
This has been an ugly stock, without a clear fix, and will
likely stay that way until the day arrives that private-equity
swoops in with a tempting buyout offer.
Risks to Consider:
If the U.S. economy slips into
, then these retailers could slump even further.
ction to Take -->
These are troubled companies, and investors have dumped them to
very low valuations. Yet that's precisely the kind of deal that
private-equity shops seek out. All of these companies generate
solid EBITDA margins and may not be around much longer as a
if their shares continue to languish. If you're willing to do a
little further research on these stocks, then you might find
yourself with a stock with an offer on the table, causing it to
surge by a wide
in short order.
-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC does not
hold positions in any securities mentioned in this article.
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