Wednesday, October 22, 2014

Alco-Stores Bites The Dust

I've had a few people ask me about ALCO Stores (ALCS) recently, so I thought I would answer the questions here. ALCS used to be a net-net that eventually ended up chewing through all its assets and finally declared bankruptcy. I haven't followed it very closely over the last year, but even so I think there is a lot to be learned from this situation.

First, be wary of companies with a lot of debt. Some net-nets are riskier than others; leverage makes it so that even in a small change in assets can have a dramatic change in equity.

Second, beware of the fixed-cost nature of retail! If demand drops, there isn't a ton that can be done to reduce that cost structure, which can leave you holding the bag as a shareholder.

Third, if your company is losing money, highly levered, stuck with legacy costs, and somehow manages to get an offer at something near net current asset value, *take the offer*!

If I had to guess, I'd say some shareholders turned down the offer last year because their cost base was still higher. So fourth, be sure you don't fall prey to the sunk cost fallacy. It doesn't matter what you paid; make sure that's not factoring into your "sell" decision.


Baruch said...

Couldn't agree more...

Anonymous said...

Do you think that its possible there will be some value left after the Chapter 11 liquidation, which would present an opportunity now at these prices?

Saj Karsan said...

Hi Anon,

It's possible, but I have no idea, so without a margin of safety I will stay away.