While the markets continue to gyrate, I've continued to find potential opportunities in the downtrodden small specialty retail names that suffered mightily during much of 2017. While I am not typically a fan of retail in general, I do like "fifty-cent dollars" no matter how ugly they are. The great purge for some of these names occurred in August; while the broad markets were humming some specialty retailers were being left for dead.
Some have recovered somewhat, and demonstrated that the market overreacted. Hibbett Sports (HIBB) , a member of my 2018 Double Net Value Portfolio is a great example. After opening 2017 at $33, shares bottomed out intraday at $9.40 on August 18th. Since then, some better than expected results, and a "correction of the correction" have pushed shares above $25.
Preliminary fourth quarter results also point to a good quarter, a rise in same store sales, and earnings that should beat the consensus. While I still have a position in HIBB, I reduced it in late January. I may sometimes be among the first to arrive on the scene of taking a position in these distressed situations, but usually not the last to leave. Sometimes that means leaving money on the table, but that's ok.
I used some of the proceeds of the HIBB sale recently to take a position in another down and out specialty retailer, Big 5 Sporting Goods (BGFV) , also a member of my 2018 Double Net Value Portfolio. This name also suffered through a rough 2017, but unlike HIBB, the stock has not recovered. In fact, it trades below where it did after the August purge. There are good reasons for that; the company reported a 9.4% same store sales decline for the fourth quarter, declining margins and a net loss for the quarter. Management pointed to a dry and warm December as the major culprit for the bad quarter; namely a 50% decline in sales of cold-weather products.
Currently yielding 9.5%, the market is expecting a dividend cut for BGFV, and frankly, I did not take a position with the belief that the dividend will be sustained, while others may disagree. But at 1.4 X net current asset value (current assets minus total liabilities) and 10.5 X 2019 consensus estimates, the punishment the stock has taken may have been too severe. Interestingly, management continues to buy back stock, including 795K shares for the full year, and 118K during the fourth quarter, and has another $15.7 million available under the current $25 million repurchase program. I am intrigued when management continues to buy back stock when times are tough, and many investors have written off a name. The hope is that such a move shows confidence, and not blind faith, but time will be the judge.
BGFV ended the year with about $49 million in debt, and $7 million in cash. I've definitely seen better retailer balance sheets, and I've also seen worse. The question is whether the recent period is the worst we'll see for this 435 store chain, with an obscenely low enterprise value of $171 million, or less than $400K per store.
This is investment dumpster diving at its finest, and is not for everybody.
