Wednesday, April 20, 2011

Hart Stores: Cheap, But Growing

Hart Stores (HIS) is a department store retailer with 92 locations under the "Hart" and "Bargain Giant" banners. The retailer has maintained profitability throughout the economic downturn, and yet it trades for less than its net current assets. In Hart's last four fiscal years, the company has generated $16 million of operating income. But today, its market cap is just $20 million, giving it a price to book ratio of just over 0.4.

The problem with Hart is not so much its historical earnings but rather the trend of those earnings. Even before the recession, margins were on the decline, suggesting the company was having trouble competing with better assorted/priced other retailers. This has occurred despite the company's claims that it has "a dominant position in many of the communities it serves". Things have now deteriorated to the point where it is in doubt as to whether the company will have turned a profit last year; fourth quarter results should be out in a few days.

But the numbers likely underestimate the problems at this retailer, as the company has been able to benefit from a strong Canadian dollar. As the company procures a lot of its products from the US in US dollars, it sells its products to Canadians in strong Canadian dollars. This is likely helping profits, and yet the financials continue to deteriorate, suggesting the company is having a lot of difficulty competing. What would happen if the currency trend were to reverse?

Even though operations are on the decline, the company is pushing ahead with expansion plans. For many investors, this likely appears to be a risky strategy; normally, value investors like cheap companies that are growing, but only if they are growing profitably. Hart's strategy appears risky, considering that the company's existing stores already appear in trouble.

Unfortunately, investors really are outsiders when it comes to this company. For better of for worse, the Hart family controls the company. As discussed before, sometimes family business owners have different priorities than maximizing shareholder value. These priorities can sometimes lead to an imperative to grow/invest in a business even if the more prudent action might be to return cash to shareholders, who can then allocate capital to investments with better risk/reward profiles.

Of course, if the Harts (who as a team occupy the Chairman, CEO, President, and three board of director positions) can turn this thing around, shareholders will be greatly rewarded. Unfortunately, there is no indication (at least to outside shareholders) that this is either possible or plausible.

Disclosure: None

1 comment:

Blindfolded Monkey said...

Something that will hold Hart back in the long run is that as the small communities in which it has a dominant position grow into medium size communities, large competitors like Wal-Mart will move in and squeeze them out. Also, at some point they will have to start dealing with a weakening Canadian dollar.

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