Saturday, August 2, 2008

Danier Leather: A Few Things to Consider

Danier Leather makes leather apparel goods and has been in business for 35 years. After doing some analysis on the company there are a few things that I dislike about the way the company has been managed.

Firstly, both top line and bottom line earnings growth are not moving in the right direction. Since 2003, the total revenues have declined from $175.5M to $158.1M. During the same period, the gross margin has flat lined between 49.4% and 49.7%. Its a bit worrisome that SG&A has increased during this period from 44% to 48% while the number of stores and total retail space has declined slightly. Also, the operating margins have contracted from 9.3% to 2.2% during this same period. From these results we can see the picture that management has not been successful steering the company to improved profits.

Another aspect that I find disturbing about Danier Leather public shares is the dual voting structure present in the subordinate voting and multiple voting common shares. The president and CEO of the company has only paid a nominal amount in contributed capital for 100% of the multiple voting shares (1.244M) giving him effectively 70.4% control of the company. Thankfully, there is a coattail provision that offers some protection to the common shareholders in the event of an acquisition event.

The whole area of effective corporate governance appears a bit suspect at Danier Leather. There are 6 board members, 5 of which have served on the board since 1998 or earlier! Most of the board members have served continuously on this board. Having rotation of board members is generally seen as a positive for corporate governance. Also, introducing a board director acting on behalf of a large outside investor would be good for corporate governance as summarized from Stephen Jarislowsky's book "The Investment Zoo" here. Unfortunately there is no such "outside" board director present on Danier's board.

Lastly, there is an ongoing class action suit against Danier Leather regarding its IPO event where it is alleged that certain information was known but not adequately disclosed by some board members prior to the IPO. I am not a lawyer and do not have an opinion if this class action suit is justified in any way, but the fact that the class action suit came up at all creates some additional doubt in my mind as to effectiveness of corporate governance at Danier Leather.

Disclosure: The author has no ownership of Danier Leather stock

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