Wednesday, October 20, 2010

Tandy Not Trendy

Tandy Brands (TBAC) markets and sells belts, wallets and other accessories under a variety of brands including its own labels, brands it licenses, and private labels (retailer brands). The company has a book value of $44 million and a net current asset value of $30 million, but it trades for just $22 million.

The company has suffered losses through this recession, as retailers have cut inventory due to the tepid consumer spending environment. But at this price, there are certain elements that make this stock an attractive one.

First, the company is cutting costs to help it return to profits. It has closed distribution facilities, which should not only cut costs going forward, but which also released some of its owned property and equipment. Management believes it can sell these assets for at least $1.6 million, which should serve to increase the company's net current asset value by around that amount.

If the company has cut it costs sufficiently to return to profitability, it also has tax loss carry-forwards that should protect it from Uncle Sam for several years, due to its losses over the last two years. As we've seen before, at current US business tax rates, these can be a huge advantage to a company's valuation.

But all is not rosy with this Ben Graham special, as it does have its fair share of risks. The company sources goods from Asia, which helps reduce costs, but results in long lead times. Compounding this issue, the company does not have contracts with its customers, meaning Tandy is on the hook if retailers reduce purchases. The company notes that it attempts to mitigate this risk by "selling our products to a variety of retail customers throughout North America". But realistically, their customer concentration (which is a serious risk in itself) makes this virtually impossible: Walmart accounts for almost 50% of the company's sales.

Retailer purchase reductions and even bankruptcies have led to inventory and A/R writedowns in the past, as the company was forced to liquidate inventory at low prices and eat the bad debt it extended to its customers. Inventory and A/R continue to represent a significant portion of the company's assets, so the risk of this reoccurring is material.

Finally, the company's CEO has brought in annual compensation that has averaged almost $1 million over the last two years. But he only owns about $120K worth of the company. Anyone in that situation would be more likely to try to grow the company (and in so doing, see an increase in importance and salary) than increase shareholder value.

Sometimes, growing the company and increasing shareholder value are the same thing; but that's not so in a company earning low returns on capital. Shareholders may or may not see stock price appreciation in this potential value play.

Disclosure: None


Paul said...

Thanks for the idea, Saj.

This is one I'm gonna pass on. Walmart has a tendency to squeeze supplier to extremes. Add in to a CEO who is highly compensated and little in stock and it's not something I'd chase.

Floris said...

Have you had a look at Swank Inc. Its in a similar business but has high insider ownership, and is not a supplier to wal mart.

Saj Karsan said...

HI Floris,

I have not. I'll post here if I have any thoughts on it.