Thursday, April 28, 2011

Danier Leather: Cheap And Accretive

Danier Leather (DL) is a vertically integrated designer, manufacturer and retailer of leather apparel and accessories. The company trades at a price to book value of about 0.75 and a P/E under 9 despite a healthy balance sheet.

Danier has a market capitalization of $60 million, but has generated more than $40 million of operating cash flow over the last four years. Because the company kept capital spending to less than $4 million in each of the last four years, most of this money accrued directly to shareholders.

Last year, the company spent more than $9 million buying back shares. This represents about 15% of the company's current market cap! In a particularly shrewd move, the company bought back a large number of shares via a Dutch Auction last year when the shares traded at about half their current level.

Currently, the company sits on $30 million worth of cash against no debt. The company should be eligible to buy back another 10% of its shares in just a few days, should it decide to continue along the path of buying back its shares, which would be consistent with its history of buybacks. This would have the effect of either pushing up the share price or lowering the company's P/E and P/B ratios even further.

But the perfect investment this is not, as there are some risks to the downside. For one thing, it has been a very profitable year for the company. While that's a good thing, investors should not rely solely on current earnings in calculating a company's earnings power. This was Danier's most profitable year since 2002, so counting on these profits as the new normal going forward may be a bit optimistic. Market forces (including competition, cost pressures etc.) could bring profits lower; they certainly have in the past.

Another potential drawback for shareholders is the company's dual-class share structure. This has allowed an ownership group to control the company without putting in the capital requisite with that level of influence. This structure results in a misalignment of incentives. It also makes it harder to oust management if it were to take actions that are not shareholder friendly.

Finally, this company has had quite an embattled history. It attempted and failed at a costly expansion plan, and managed to irk a few shareholders resulting in a costly lawsuit. While expensive, those incidents are now in the past and have already been paid for; but investors should note that the same management team is still in place, and so if they haven't learned any lessons, similar problems could cost shareholders in the future.

Disclosure: None

1 comment:

BB Canada said...

Just to be clear, they won the lawsuit on appeal and did not pay anything out.

I believe that Danier has turned the corner here with a strong focus on maintaining market share and margins. A lot of their issues and losses were because they lost focus on their key customers and tried to go after the younger market.

On their last conference call they talked about keeping their large cash horde as a competitive advantage when opportunities appear (such as a sellout of leather at a cheap price), but if they continue to generate the cash flows they are showing now, another share buyback or perhaps a dividend should be in the cards.marrhy