Wednesday, July 23, 2014

Bon-Ton Stores Are Shortable Below the 9-10 Price Range

The chart above is a weekly chart of the Bon-Ton stores.  Going back about a year and a half, the 9-10 dollar price range has provided tremendous support for the stock.  The stock has also had trouble developing any upward momentum.    It's only had two meaningful rallies in the last two years, and both fizzled out.

The chart tells us that if prices move below the 9 price range there is downside opportunity.  Let's look at the reasons why.  First, BONT is a department store, as explained in their latest 10-K:

The Company, a Pennsylvania corporation, was founded in 1898 and is one of the largest regional department store operators in the United States, offering a broad assortment of brand-name fashion apparel and accessories for women, men and children. Our merchandise offerings also include cosmetics, home furnishings and other goods. We currently operate 271 stores in 25 states in the Northeast, Midwest and upper Great Plains under the Bon-Ton, Bergner's, Boston Store, Carson's, Elder-Beerman, Herberger's and Younkers nameplates, encompassing a total of approximately 25 million square feet.

I really dislike retail for a number of basic reasons: margins are very low (meaning fixed costs are very high), competition is intense and the US consumer is still luke-worm on spending, especially on non-durables (BONT's bread and butter):

And then, like all retailers, there is the 200-pound gorilla in the room: AMAZON, which is hitting everybody in the industry hard.

The company's balance sheet is actually in OK shape.  The Current ratio has been fluctuating between 1.7 and 1.92 over the last five years.   While the quick and cash ratios are much thinner, this is to be expected from a retailer where inventory is over 80% if current assets.

The real story here is stagnating sales and lack of profitability.

As the chart above shows, the best pace of growth over the last 4 years was .86%.  And the margins aren't much better:

While the gross margin (in blue) has been printing at consistent levels over 35%, the best the operating margin has been over the last five years is 4.44%.  But the average margin for the same time period is 2.87% while the median is 2.45%.  Then there's the net margin level, where the best reading over the same time period is .71%.  And for the other four years, the company has lost money, which is slowly bleeding the company's cash:

Total cash has consistently dropped from $18.9 million to $7 million over the last five years.

And finally, there is the book value situation:

Using the standard assets-liabilities book value calculation, we see a drop from $141.7 million to $127.9 million over the last five years.  However, that calculation assumes inventory is valued at 100% -- which would never happen in the a fire sale.  So, valuing inventory at 50% (which is part of the G&D analysis) we get a negative book value.  Now, a store of this prominence would never sell for nothing.  The point, however, is this company's overall value is at best declining. 

Between the intense competition in the industry, a deteriorating revenue and margin situation and the declining overall value, this stock is a sell.  A technical move below $9 would indicate the market has re-evaluated the company's overall prospects negatively, meaning it would be time to short.

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