Recently sold 1/2 of my position in Borders Group (BGP) after sticking out its near annihilation in Q1 of this year.
Why? Trends
There are two new trends and Borders is not at the head of either of them….
I own a Blackberry and have started listening to books on it while I do research and blog late at night. The #1 app for the Blackberry to do this is from Audible.com. Who owns Audible? Amazon (AMZN). Being a Borders shareholder and a team player I of course looked there first but was unable to find the ability to buy a title on Borders.com and then listen to it on my Blackberry.
Now, it may be possible to do it, but it was not readily apparent so either it does not exists or is hidden. Following my “I’m not that different that most folks” mantra I have to think scores of other Blackberry users are doing the same thing and Borders is not capturing that crowd
Reason #2
eBooks. Amazon (AMZN) and its Kindle are clearly #1 is this very rapidly growing category. But, with the growth there, a strong #2 can do very well especially if they have the option to combine it with an actual bookstore to capture all audiences.
Borders has the Sony reader and an eBook section on its website. They were, by default #2 but failed to capitalize on that standing and now have this:
Barnes & Noble (BKS) and AT&T (T) already went ahead and offered free WiFi to iPhone users (and everyone else, albeit inadvertently) last year, and it’s now finally gone and given up on those pesky subscription fees altogether. As the pair of companies jointly announced today, that new and welcome change is now already in place at all Barnes & Noble stores in the US that offer WiFi, and the bookstore is not-at-all-coincidentally taking advantage of the opportunity to promote its recently launched eBookstore, to say nothing of its forthcoming e-book reader. Last we heard, they still have actual books and stuff there, too.
Customers Can Download Barnes & Noble Free Apps and Get Access to the World’s Largest eBookstore — Exclusive Content, Customer Reviews, Information about In-Store Events, Locate a Store, and Much More..
In short Borders sat back while BKS passed them in the category. Again there is no apparent eBook store on the Borders site so it would appear this medium is not a huge category.
What recently was the #1 iPhone free app? The Barnes and Noble app. Barnes and Noble has figured out the way it would seem to tie the eBook/online/smart phone/book store crowd together.
Borders? Nothing. Now again Borders may have these items out there, but if they do, they have done an abysmal job promoting them and it is costing them.
What to do then? Borders is well on its way to fixing it financial house and that ought to propel shares back above an area I need to eek out a small profit on what I have left for my efforts there. After that, I’m not so sure.
Remember last summer when it was rumored BKS was looking at buying BGP? Maybe this was the reason for passing, they had plans to beat them rather than join them…
This goes to why you just can’t buy cheap and ignore. You have to follow the business environment surrounding what you own. If it changes negatively and in my opinion Borders has, then you must re-evaluate your thesis. While I will most likely not lose any money (most likely make 5%-10%) on Borders, the big opportunity in it is fading and I feel I have far better options elsewhere.
Disclosure (“none” means no position):Long BGP, none
Russ Berrie and Company, Inc.’s Infant & Juvenile Group is composed of four wholly-owned subsidiaries: Kids Line, LLC; Sassy, Inc.; LaJobi, Inc.; and CoCaLo. The Kids Line division designs and markets infant bedding and related nursery accessories under the KidsLine® brand. The Sassy division offers products and collections such as infant development toys, teething, feeding, bathing and baby care products. LaJobi is a leading designer, manufacturer, marketer and distributor of branded infant furniture and related products. CoCaLo is a leading manufacturer and distributor of infant bedding and accessory products under the brands of CoCaLo Baby, CoCaLo Couture and CoCaLo Naturals. The businesses also license brands for select categories and markets including Disney®, Carter’s®, Graco® for cribs and Serta® for crib mattresses.
The business has undergone significant changes in the last year, first:
12/29/2008 8:15:00 AM
OAKLAND, N.J.—Gift and juvenile product maker Russ Berrie and Company has sold its gift business, which includes its plush toy lines, to The Encore Group, a privately held giftware company.
Encore acquired the stock of all of Russ Berrie’s active worldwide gift segment subsidiaries, as well as certain other assets of the gift business. In exchange, Encore gave Russ a 19.9% stake in its newly consolidated gift business, plus a promissory note for $19 million that matures in December 2013 and earns interest at an annual rate of 6%. In addition, Encore has retired the company’s gift credit line with LaSalle Bank.
Russ will retain its “Russ” and “Applause” brands, which will be licensed exclusively to Encore for five years for a fixed annual royalty payment of approximately $1.2 million. Encore will have the right to purchase these brands upon expiration of the license term, and Russ will have the right to require Encore to purchase the brands at the end of the license term, for an aggregate purchase price of $5 million.
Juvenile products vendor Russ Berrie & Co. reported its first quarter 2009 adjusted net income as $1.9 million, or 9 cents per diluted share, with EBITDA from continuing operations totaling $6.3 million.
The results also showed Russ Berrie’s first quarter net sales were $56.3 million, an increase of 35.2% over 2008 levels, primarily resulting from the company’s acquisition of the LaJobi and CoCaLo brands in April 2008. Gross profits for 2009 Q1 were $16.9 million, up slightly from 2008 due to the acquisition of LaJobi and CoCaLo. Acquisition of the two brands pushed selling, administrative, and general expenses to $12.5 million, up from Q1’s 2008’s figure of $9 million. Other expenses more than doubled to $2.2 million from 2008 levels, again due to costs incurred in acquiring LaJobi and CoCaLo.
“We are pleased with our first quarter results, which were ahead of our expectations,” said Bruce G. Crain, chief executive officer and president of Russ Berrie and Company, Inc. “Our team executed well as they continued to navigate a very challenging economic environment. We are also encouraged about several fresh product placement programs we secured for the balance of the year, even as retailers remained conservative about inventory replenishment during the first quarter.”
The company noted that these first quarter results reflected its first full quarter as a streamlined infant and juvenile product business focus following the divestiture of its gift business in December 2008.
The children’s arena has proven to be the most resistant to the current economic conditions compared to others (note RUS still profitable). If one also takes a walk thru a Babies R’ Us, you’ll notice the store is stocked with the brands they sell.
The deals they have done have worked to date also. They sold the gift division that lost about $1m a quarter and in return will receive $1.1m on Dec. 31, 2009 and then the same amount annually (paid quarterly) for the next 5 years in addition to the $5m bulk payment at the end and $19m promissory note. The recent additions listed above have increased both sales and income from operations.
What is particularly interesting was this release: Then in late May:
May 28 /PRNewswire-FirstCall/ — Russ Berrie and Company, Inc. (NYSE: RUS) announced today that it has begun to explore a full spectrum of strategic alternatives to enhance shareholder value, a process it began as a result of several inquiries regarding potential transactions the Company received following the divestiture of its gift segment in December. While the Company’s principal focus will continue to be the execution of various growth strategies for its infant and juvenile business, it will also evaluate a possible merger, acquisition, strategic partnership or sale of the Company.
Bruce Crain, President and Chief Executive Officer of the Company, commented, “The sale of our gift segment transformed our business and focused our efforts on the attractive infant and juvenile industry. Our objective now is to establish an even greater presence in the industry by building upon our market leadership. Based on the inquiries we have received, we have decided to examine a full range of alternatives that may enhance our long-term potential.”
Mr. Crain continued, “In addition to considering our external strategic alternatives, we remain committed to our internal growth strategies to create shareholder value. Accordingly, we are focused on the following: first, to win market share by creating design-differentiated, branded products; second, to expand our product offerings into complementary categories; third, to grow and diversify our distribution channels; fourth, to drive sales and marketing collaboration across our businesses; and fifth, to capture operational synergies that yield cost savings throughout our organization.”
So it would seem that in the process of dumping the gift division there were offers/proposals for the rest of the company that were legitimate and interesting enough for management to now want to explore them in more detail. My guess would be that a larger buyer took a look at the company, still profitable and trading for $4 a share and perhaps inquired about just buying the whole thing.
RUS is in that sweet spot now of being profitable enough to garner attention and cheap enough ($93m market cap) that a cash deal from a larger buyer is doable without any banks financing, the hurdle for many deals being thought about today.
RUS ought to earn about $.50 for the whole year, 2009. If we apply a modest 14X-16X multiple to those earnings, we get a share price of $7-$7.84 or 60%-80% higher than the current one. Not bad for 6 months of investing?
Now the obvious risk is that the general economic downturn becomes a prolonged one. BUT, Q1 was as bad economically as we have seen and RUS earned $.06. We know Q2 was better for the general economy (company results not released yet) and Q’3 & 4 even better, if only modestly. That being said, the $.50 number would seem to be a rather conservative one that would require neither substantial economic improvement or spectacular results from the company to achieve.
Watch what Zell has to say about interest rates. This is the reason those of us who fear inflation down the road doubt the Fed’s ability to fight it. IF, we see inflation a year or two from now the Fed will be forced to raise interest rates, that action will cause a potential undoing of the CRE market and douse any revival of residential real estate that may be happening at the time.
In this lecture filmed on April 11, 2008, Stephen Schwarzman, Co-Founder of Blackstone Group, a private equity firm, speaks about his experience in the industry. He discusses his thoughts on global finance, particularly at such an interesting and challenging point in the history of financial institutions. Although the near future might be rough for the United States and economies around the globe, capital does tend to come back and regulators are busy figuring out how best to put safeguards on the system. He also offers career advice and mentions some of the surprises he came across upon entering the world of finance.
This is a big win for General Growth Properties (GGWPQ). They now have control over the Chapter 11 process AND more importantly have increased leverage over lenders who want/need payments on debt to continue.
Here is the scenario:
GGP now has until the end of February to submit a plan. That means lender with billions in debt outstanding will be receiving nothing on that debt. GGP now has time on its side and lenders will be more willing to renegotiate loans on better terms to enable GGP to file its plan and resume payments before next February….
This is really good news…..
NEW YORK (Dow Jones)–A bankruptcy judge gave General Growth Properties Inc. (GGWPQ) a six-month extension to file its bankruptcy plan over opposition from a number of the mall owner’s lenders.
Judge Allan Gropper of the U.S. Bankruptcy Court in Manhattan extended the deadline for filing the reorganization plan to Feb. 26, rejecting calls from creditors for a shorter extension.
The extension granted by Gropper gives General Growth exclusive control over the path of its bankruptcy case by preventing creditors from filing rival reorganization plans with the court.
Marcia Goldstein, General Growth’s bankruptcy lawyer, said the Chicago-based mall owner will use the time to negotiate with lenders over a restructuring plan. General Growth filed for bankruptcy in April to lighten its $27 billion debt load.
“Six months is actually very ambitious. We hope to file the plan in this period” and negotiate an agreement with creditors, Goldstein told Gropper. “But that’s going to require a lot of work on multiple fronts.”
The six-month extension, she said, was reasonable for the largest real-estate bankruptcy case ever filed. She told Gropper there would be “chaos” if the court denied the extension because the company could face more than 100 rival plans from lenders to its malls.
Lenders and servicers – companies that handle defaulted loans to the malls on behalf of lenders – objected to the six-month extension, saying it was too long. Most didn’t oppose an extension, but urged Gropper to approve a three-month extension, which they said would push negotiations forward.
But Gropper said General Growth’s bankruptcy case will be “in a better position” with the longer extension, and he noted that the company made a commitment to provide restructuring proposals to lenders soon.
“The goal should be to have a plan or plans proposed within the six-month period,” he said.
Notice every metric they are now forecasting is worse than their expectations in January? This goes back to Bernanke saying in 2007 he thought the housing crisis would “be contained” and “would not effect overall economy”. The Bernake Fed has been consistently overly optimistic in its forecasts only to then have to lower them.
Now, the reason for being optimistic is obvious, to instill confidence in a fear ridden environment. But, after a while that strategy begins to backfire as folks begin to discount everything the Fed says as they begin to expect actual results to come in worse than expected. Then it becomes a “how much worse” guessing game.
I get the whole transparency effort vs Greenspan’s ramblings, but if we are going to do it this way, then the transparency has to be 100% honest and not an attempt to steer investor sentiment in a particular direction. In that case, the transparency is simply “transparent manipulation”.
Now, I also understand that no estimates are perfect, BUT, when over the course of a few years they almost to a 100% rate err in the same direction, then it is either intentional, OR the methodology to make them is flawed. Either scenario from the Fed is bad.
Just give it to us straight Ben, we can handle it far better than you think we can…
Notice every metric they are now forecasting is worse than their expectations in January? This goes back to Bernanke saying in 2007 he thought the housing crisis would “be contained” and “would not effect overall economy”. The Bernake Fed has been consistently overly optimistic in its forecasts only to then have to lower them.
Now, the reason for being optimistic is obvious, to instill confidence in a fear ridden environment. But, after a while that strategy begins to backfire as folks begin to discount everything the Fed says as they begin to expect actual results to come in worse than expected. Then it becomes a “how much worse” guessing game.
I get the whole transparency effort vs Greenspan’s ramblings, but if we are going to do it this way, then the transparency has to be 100% honest and not an attempt to steer investor sentiment in a particular direction. In that case, the transparency is simply “transparent manipulation”.
Now, I also understand that no estimates are perfect, BUT, when over the course of a few years they almost to a 100% rate err in the same direction, then it is either intentional, OR the methodology to make them is flawed. Either scenario from the Fed is bad.
Just give it to us straight Ben, we can handle it far better than you think we can…
Alan Blinder, a Professor of Economics and Public Affairs at the Woodrow Wilson School and co-director of Princeton`s Center for Economic Policy Studies, discusses the financial crisis.
There was a nice little piece this weekend in the WSJ about on of our favorite stocks/companies here at ValuePlays, Phillip Morris International (PM)
From the WSJ:
With most of the world in recession, expensive habits are fading fast. But international tobacco companies are still making smokers pay up for a hit.
While many consumer-products companies have capped prices, the likes of Philip Morris International and London-listed British American Tobacco are raising them. With cigarette sales likely in permanent decline in some markets, producers have focused on price.
Heard on the Street columnist John Jannarone explains to Simon Constable how premium cigarette manufacturer Philip Morris is actually getting a boost from foreign governments. Plus how industry consolidation is giving profits an extra lift. That has helped some tobacco companies smoke market expectations. PMI’s shares have risen 8% since Thursday morning, when it said higher prices had boosted second-quarter profits. In the European Union prices rose about 5%, the fastest pace in over a year, according to Thilo Wrede of Credit Suisse.
And tax laws can actually work in favor of premium tobacco companies. Many countries tax cigarettes by the pack rather than as a proportion of the retail price.
That has caused low-end cigarette prices to rise more quickly than premium cigarettes. In France, for instance, premium cigarettes only cost 15% more than the cheapest option, according to Morgan Stanley’s David Adelman.
PM reported last week and raised full year guidance. Shares are up over 40% from the March lows and 8% last week as a result of earnings. They currently have a dividend yield of 4.5%.
Some very interesting items were discussed recently on the Developers Diversified (DDR) earnings call. As I read it I was struck how much of what was being said contradicts some of what is being assumed out there regarding the retail environment. Diversified is seeing strong leasing activity, rental rates that are not collapsing and assets they do not want (not prime) are selling for cap rates of 8.5% to 9%. One could assume from that prime properties would go for below 8.5%. These cap rates gel with what Macquarie CountryWide Trust (MCW.AU) recently sold assets for.
None of these numbers are nearly as dire as you would be lead to believe watching/reading media reports.
Here are some highlights:
Regarding leasing activity:
The short term macroeconomic headlines may suggest otherwise, but the current retail real estate environment presents a unique opportunity for retailers to aggressively seek external growth at significantly lower costs. Over the course of the second quarter, out leasing team held many key meetings with retailers to understand revolving platforms, and as a result we leased a historic amount of GLA.
Specifically, we signed 147 new leases during the quarter representing over 900,000 square feet of GLA at an average rental rate spread of negative 16.6. Additionally, there were 259 renewal deals executed during the quarter representing over 2.1 million square feet of GLA at an average spread of positive 1%. On a blended basis, there were 406 deals executed during the second quarter representing nearly 3.1 million square feet of GLA at an average spread of negative 4.72%. Compared to the previous quarter, we executed 58 more leases and leased 1.2 million more square feet of GLA.
I’d like to point out that of the 900,000 plus square feet of new deals signed during the second quarter, 45% represent space that was recently vacated by bankrupt retailers. The spread on new deals signed to backfill space formerly occupied by bankrupt retailers was negative 24.2%, which is consistent with our expectations and past guidance, while the average rental rate spread on new deals, excluding those signed to backfill bankrupt retailers, was negative 9.8%.
Despite the challenges of backfilling space formerly occupied by bankrupt retailers, we have seen solid improvement in the rental rates from the first quarter to the second quarter. In the second quarter, we leased 466,000 square feet of space that was previously occupied by bankrupt retailers versus the 233,000 square feet leased in the first quarter. And the average rent per square foot increased 63% for that space from the first quarter to the second quarter, resulting in an overall positive impact on our average base rent per square foot portfolio wide.
The most active retailers include Bed, Bath and Beyond and its various concepts, Best Buy, hhgregg, Hobby Lobby, JoAnn stores, Nordstrom Rack, Dollar Tree, AC Moore and regional grocers, such as Sprouts. Also very active are Staples, Michaels, and the TJX companies, the parent company for T.J. Maxx, Marshalls, A.J. Wright and HomeGoods. We have multiple executed leases or inactive lease or LOI negotiations with each of the retailers that I just mentioned.
I would also like to highlight the fact that two of our largest tenants, Wal-Mart and TJX, recently announced significant long-term debt refinancing transactions. The low cost of capital of many of our largest tenants is likely to encourage and fund their future growth.
From the Developers Diversified Q & A:
Jay Haberman – Goldman Sachs
And just switching gears for a moment, could you walk through I guess the bid as spreads on asset sales. I mean it seems, as cap rates seem to be moving above 9%, are you seeing a lot more interest on the part of buyers?
Scott Wolstein- Chairman and Chief Executive Officer
There’s been a little bit of an increase in cap rates in terms of our pipeline. Most of it’s been related to the quality of assets that we’re selling. Obviously, the lower the quality, the higher the cap rate and we’ve been highly focused on selling the assets that we don’t want to own.
But the assets have reasonably good quality that may not make the cut for our prime portfolio that are under contract and we’re negotiating. We’re still trading in the mid-eights to the low nine kind of cap rate range. So I think that there hasn’t been a really significant change.
And I also think, obviously, there is a big print on the trade for McCrory Countrywide to CalFirst and First Washington. I think it’s a little dangerous for people to extrapolate from a transaction of nearly $1 billion in size as to what it means for cap rates on individual asset sales.
In a transaction of that magnitude, as you can image, there’s very limited competition and it’s a much more difficult negotiation. On the one-off deals, it’s a very, very different landscape in terms of leverage. And you shouldn’t expect to see any significant difference in terms of future asset sales here on a cap rate basis from what we’ve been able to achieve earlier this year
Later:
Carol Kemple – Hilliard Lyons
Where do you all expect to see occupancy at December 31st?
Dan Hurwitz- President and Chief Operating Officer
We think that occupancy will go up, as I mentioned, nominally in the second quarter and again – I mean in the third quarter and again in the fourth quarter. So at the very high end, we think we can end the year at about 50 basis point plus in occupancy from where we are today, and on the low end somewhere in the 20 to 30 basis point movement.
Now this does not mean there will not be significant CRE stress and probably more REIT’s that go under. But it also means that there will be survivors and simply avoiding the whole sector due to armageddon scenarios I think will cause many to miss some significant opportunity.
