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Sportsmans Guide has an unleveraged return on equity of over 35% and trades at 4.85x free cash flow (defined as operating cash flow minus capital expenditures). The company is a retailer of sporting gear and other outdoor items. It sells its products primarily through its catalogs and web site. If you are not familiar with this companys wares, please check out www.sportsmansguide.com and spend freely. 1) The company has a strong niche brand. Its customer following has been cultivated since Sportsmans Guide was founded in 1970 as a catalog of products targeted at deer hunters. Over the years, founder Gary Olen has broadened the original catalog into a business producing $180 mil in revenue per year through a series of monthly catalogs with a distribution of 46 million per year. Indicative of the loyalty of the customers is the success of the companys recent Buyers Club initiative. Buyers Club members purchase a yearly membership for $29.99 to receive catalogs with limited run items available only to members. Members also receive 5%-10% discounts on most items. The number of members was 310,000 at 12/31/02. Membership grew 22% last year and has continued to grow in the 1st quarter. 2) A key competitive advantage for a catalog marketer is its database of customer names. 85% of the companys revenues come from existing names in its database of sporting and outdoor enthusiasts. Sportsmans Guide has 5.2 million names with demographic data and purchasing history in its customer files. Of these, 1 million names have purchased a product within the last 12 months. Over time, the company has used response data to subdivide this database into subsets of customers. These subsets receive different specialty catalogs in addition to the main Sportsmans catalog. The specialty catalogs have different product focuses: government surplus, camping, shooting, hunting, etc. Subdivision improves response rates which reduces unnecessary mailing costs and improves economic returns. Ever since the launch of the online Sportmans catalog, the database has also been supplemented with email lists. There are approximately 900k names in the email database and nearly all of them receive a broadcast email every 1 or 2 weeks. 3) The companys bargain focus is hard to replicate. The company has developed a customer following partially because of its history of value-priced bargain items in its catalogs. These items are 25%-60% off retail. The company is able to offer these prices to customers because the company's buying agents comb for discontinued/liquidation/overstock items through a network of 1200 supplier contacts. Because the supply of overstock items is irregular, its critical to have the ability to purchase opportunistically and store cheaply. All inventory is stocked in Sportsmans warehouses in Minneapolis. Catalogs are customized to include these overstock items shortly before printing so the inventory carrying period is minimized. The companys customer base of bargain hunters allows SGDE to move these items faster than other competing retailers. What cannot be sold via its regular catalogs and online store is liquidated through its bargainoutfitters.com site and a small retail location the company has in Minnesota. Everything from the low grade paper in the companys catalogs to the incentive systems for maintaining high shipping accuracy is aimed at selling cheaply and producing a solid return on capital. 4) I believe there is a fundamental shift in SGDEs business that is reducing costs in the company and improving return on capital. Its this fancy new thing called the internet. Up until 1998, all of the companys business was done through print catalogs. Millions of these catalogs were distributed each year with each one incurring shipping and printing costs. Theres also higher production costs and longer product lead time required when doing business by catalog.
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The company began its web site in 1998 and by February 1999 had its full product offering on the web. Sales generated through its web site have grown each year from 1998 to 2002: $1 mil, $14 mil, $24 mil, $36 mil, $53 mil. The company is encouraging this transition by prominently mentioning the web site in the catalogs it continues to distribute. In the 4Q of 2002, internet sales generated 30% of total company sales. So what? Well, aside from the reduced capital needs, the company has a chance to take out a major portion of its operating expenses if it can successfully transition its business to the internet. Its current cost of distributing catalogs is approximately $30 mil a year. A large portion of any reduction of this $30 mil in expenses would drop to the bottom line. Considering that free cash flow is currently $8.3 mil, even a small amount of savings would produce a large effect. The company has reduced catalogs mailed from 80 million in 1999 to 46 million in 2002. SG&A (which include the catalog costs) has been falling: 34.8% of sales to 30.8% in 2001 to 29.3% in 2002. These are the initial signs of the internet's impact on Sportsman's business. Catalyst The company has recently initiated a share repurchase program to retire up to 10% of its outstanding stock. The company has a history of returning capital to stakeholders. $7.4 mil of debt was paid down in 2000. $5.2 mil of debt was paid down in 2001. (In 2002, cash simply built up because debt was retired). Now that the company is debt free, it is using a portion of its cash hoard (currently equal to about 20% of market cap) to retire a substantial number of outstanding shares.
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Subject Private Net 10 charlie479 06/10/03 10:40 AM working capital Yes, free cash flow has benefitted from working capital reductions and a positive D&A - Capex spread. I believe much of the working capital reduction is due to a permanent improvement in the underlying business rather than a temporary fluctuation in the WC. For example, deferred revenue has been increasing because of the Buyer's Club program which began in earnest in Fall 2000. The subscription payments received by the company are not recognized in the income statement until members buy items and utilize the member discount. If members don't utilize it then the excess is not recognized until the end of the subscription period. I believe the income statement plus the change in the deferred revenues better approximates the current earnings power for this company; GAAP income statement currently understates it. The company has also been moving inventory levels downward. Part of this is a one-time benefit from the elevated inventory levels in 1999 when management pursued a "strategic initiative" to expand SKUs and increase categories into better margin products. But the other reason inventory levels are falling is that inventory turns are increasing because of the new web channel of sales. The amount of time between the purchase of a product by the company to the time the product is listed for sale is shorter for the web than for a catalog. There's no time needed for printing up the catalog and mailing it and then waiting for the customer to mail back their order. I don't know when these improvements will stop but I'm not sure I would assume that a zero net working capital level means improvements are over. While this company is no Amazon (thankfully), it's useful to look at that pure web retailer's economics to get a sense for the potential WC possibilities. AMZN has a negative NWC level of $750 mil so it's possible SGDE's WC could be very negative. Not only that, but the deficit seems to increase as sales increase because payments come in faster than payments to suppliers. I think the D&A / capex discrepancy can be sustained for a while longer. Up until the launch of the
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Thank you for your comments on SGDE and the QUIPs. Regarding the QUIPs, it does seem that justice has failed the little guy this time. I'm saving my comments until after the bankruptcy case and hope to post a follow up. My main regret is that I should have posted the MCI Bonds idea instead of the QUIPs and I feel terrible that VICers may have lost money on the trade. Hopefully VICers will make some money on SGDE or the 3 other ideas I have posted on VIC. ben111 4 charlie479 06/09/03 12:48 PM Free cash flow I've been measuring free cash flow over calendar year periods so that may produce our difference in calculations. For the last 3 years, I have: Year OCF - Capex = FCF 2002 9.2 - 0.9 = 8.3 2001 13.0 - 0.5 = 12.5 2000 10.2 - 1.5 = 8.7 I chose to use the 2002 $8.3 mil for free cash flow in my calculation. For enterprise value, I get $40.3 mil ($46.3 mil market cap plus $4.9 mil for options minus $10.9 mil of cash at 3/31/03). This gives me a EV/FCF multiple of 4.85x. I suppose it doesn't matter much whether multiple is 4.85x or 5.2x. It's pretty cheap either way. There are few companies with free cash flow yields of around 20%. > Thanks for posting this. Wish you had told us about it two years ago before it went from $2 to $10. I'll post it earlier next time :) But, hey, I wish someone would have told me about Berkshire Hathaway decades ago. I try not to look at the historical charts too much. They should be irrelevant to investment decisions today. I've found that staring at the charts sometimes leads to irrational (and sometimes harmful) buy/sell decisions. Comments 3 zzz007 06/09/03 11:23 AM on insider sales? Wondering if you have any thoughts on recent insider sales by Shiel and Paletz. I realize that the sales aren't large in relation to their overall holdings, but find it interesting that they are sellers for the first time in nearly a year. It seems as if their sales have historically been good short term indicators of near-term stock price performance. Re: cash 2 grant387 06/09/03 11:01 AM flow Charlie, I think this is a fantastic idea.
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Wasn't a joke. I don't think it's any board member's business whether another member has fulfilled his requirements. That's up to the webmaster. If somebody wants to be an enforcer they should set up their own site, not cling onto somebody else's coattails. 29 zzz007 05/13/05 11:45 AM Compliment? Sounds more like a tattletale to me. When my kids do that, I give them a firm spanking. 28 glasshalf902 05/13/05 10:00 AM LOL
Charlie, take it as a compliment (which it is). I'm looking forward to your next write-up. Enjoy the weekend. Warm regards, Glass half 27 charlie479 05/12/05 01:11 PM glass half
You've caught me. I have not posted anything in a long time. I don't get many good ideas and sometimes there are long stretches of nothing. As far as I know, the two ideas per year requirement is still in effect. I had been hoping that I'd slip through the cracks in the system. I promise that if I find something worthwhile I will post it. 26 robert511 04/30/04 09:55 AM Management
I listened to the conference call yesterday and was shaken by how evasive and uninformed
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Hi, I didn't think anyone was still reading the Sgde board. I don't really have anything new to add to the analysis but there was a conference call today that you may want to check out if you missed it. charlie, any 24 chuck307 04/28/04 10:17 PM update? Charlie, thanks for the great idea. The company continues to execute and is doing very good business. Any updates? SGDE 23 charlie479 10/09/03 10:39 AM updates 3Q guidance SOUTH ST. PAUL, Minn., Oct. 9 /PRNewswire-FirstCall/ -- The Sportsman's Guide, Inc. (Nasdaq: SGDE) today announced that the Company expects to report total sales of approximately $41.0 million and earnings per share of $0.12 to $0.13 for its third quarter ended September 30, 2003. This would compare to third quarter 2002 results of $36.7 million in sales and earnings of $0.05 per share. Earnings will be above the consensus First Call(R) estimate, which is $0.09 per share. The Company plans to report its final quarterly results at 5:00 pm CDT on Tuesday, October 28, 2003. Gregory R. Binkley, President and Chief Executive Officer of the Company, stated, "Our trend of reporting stronger than anticipated results continues with our third quarter. Internet-related sales as a percentage of total sales will once again exceed 36 percent, compared to 30 percent for the same period one year ago." 22 charlie479 09/22/03 01:09 PM matthew
The circulation number in their press release does not include email solicitations. Circulation increased to 9.2 mil from 8.8 mil. I wouldn't focus too much on the quarterly circulation because it tends to fluctuate as catalogs shift back and forth into adjoining quarters. In this quarter, the company shipped the same number of catalogs (7) this year and last. Their mailing list is growing and that is why circulation was up this quarter despite the same number of catalogs produced. I believe the longer term trend is still towards fewer catalogs, and less expense per dollar of sales as a result. For example, the company mailed 16 catalogs in the first half of this year versus 18 last year. Sales still managed to increase because of more recipients per catalog and also because of rising internet sales. Internet sales rose to 36.5% of total sales in the 2Q. Ad expense and SG&A as a % of sales fell as a result. My understanding is that most (if not all) of their buyers are located in the US. They regularly troll for discontinued/overstocked items from a large number of manufacturers, wholesalers, etc. But I do not know how many of these suppliers are from Asia. 21 matthew618 08/21/03 02:24 PM sourcing
Charlie, Thanks for a great idea. Just so I understand, in their press release, they do go on to say that "total catalog circulation for the quarter was 9.2 million compared to 8.8 million for the same period in 2002" - are they including email solicitations in that number? Was just struck that it grew year on year given your thesis on their lowering catalog distribution costs. Also, was wondering if they have buying agents in Asia and other low-cost areas. Maybe thats not their game but seems like if you had the contacts you could find quite a bit of overstock type items and would be a way to expand margins. Thanks again,
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I'm never a fan of options grants. The only semi-comforting thing I can say is that in 2000 it was only 50k. In 2000, earnings were hurt by the closure of a retail store, and an equity placement that never materialized. They had also been expanding the warehouse and building out the internet fulfillment capability. Some of these latter items were capitalized in 99 but didn't fully start hitting the income statement until 2000. I believe the inventory is fairly clean. We're not dealing with a serial one-time expenser in SGDE. If you look through the last 9 or 10 years' worth of financial results, you'll see there aren't any inventory write-downs or extraordinary adjustment items. Also, inventory has actually shrunk from $37,403 at 12/31/98 to $20,593 at 12/31/02. So the company has been able to liquidate the inventory at carrying value (more, actually) over the last 4 years. Inventory should be in much better shape now than it has been in the past. Shareholders' equity was $3.3 mil in 1994 so it has grown to $20 mil last year. To be honest, though, I don't focus much on book value. It's inversely proportional to the attractiveness of the business in my view. The $394k bonus was pretty big in 2002. I'm hoping all the VICers on this board will call and scold the ceo for that :) In 2000, though, note that the top 3 guys didn't get any bonuses. My impression is that they will not reward if the results don't warrant it. I haven't been trying to estimate the long-term growth prospects for the business. This stock is more of a play on the conversion of the existing business over to a more efficient model that requires fewer expenditures on catalogs. I think even if the overall business does not grow much, you can have a decent return solely from this conversion. 17 zzz007 06/21/03 12:48 PM Correction
Sorry, my last post was way off the mark. 1.15mm options + warrants @ $5.35/shr average; not nearly as bad. Punched in the wrong number on the warrants when I was calculating the average. Options 16 zzz007 06/21/03 11:39 AM dilution
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pardon my ignorance, but some basic questions? - you at all concerned about the option grants, 250k the last 2 years on a 10m share base? Seems more than a little excessive on the face of it - what happened in 2000? Start-up costs? what is that severance commitments they talk about? equity placement? - since book value is essentially inventory, what assurance do we have that the inventory is worth what they say it is worth? - if this company has produced this much free cash flow, why do they only have 20m in book value at this point? - could you speak to the proxy? Esp. trends over the past few years? The CEO's latest pay - 219k base, 394k bonus, 50,000 options looks pretty fat for a company this size - what is your estimate, guess as to the long-term growth prospects from here? Thanks for posting this idea... 13 david101 06/10/03 01:18 PM Dividends Charlie, I would not say that dividends are any more efficient, but they are more attractive. Let's look at the possibilities. The company has committed to buying back 10% of their stock, which is about 476,000 shares. At $10.32/share, that's $4.9 million that they are spending on buybacks. Or they could use that same money and declare a special dividend of $1. Or they could institute regular dividends of $0.50 per share per year, for a 4.8% yield, which would represent about 55% of earnings. Given the low investment yields in today's market place, a 4.8% dividend yield that has the potential to grow will look very attractive to the equity income crowd. It is pretty easy to understand when a company buys back its stock when its trading at a significant discount to book value. I can almost rationalize your argument that buy backs below your intrinsic value are okay, but your value is really dependent upon steady cash flow. That's not necessarily bad, just subject to more fluctuations, and hence more risk. Consider for a moment CI. They spent something like $4-5 billion on buybacks in the last 5 years and the purchases were all made well above book value. When they ran into problems last year, the stock got crushed and obliterated any benefit from the buybacks. I am not saying that will happen to SGDE, but it does highlight the risk. The benefits of buy backs above book are dependent upon a steady earnings stream. That said, I really do like this idea. Thanks. David 12 charlie479 06/10/03 11:11 AM doob
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The Sportsman's Guide to be Acquired by Redcats USA for $31 Per Share in Cash Friday May 5, 12:52 am ET SOUTH ST. PAUL, Minn. & NEW YORK--(BUSINESS WIRE)--May 5, 2006--The Sportsman's Guide, Inc. (Nasdaq:SGDE - News), a leading catalog and online marketer of outdoor and sports gear, and Redcats USA, Inc., a leading catalog and online marketer of apparel and home products operating in North America, announced today that The Sportsman's Guide has entered into a definitive agreement pursuant to which VLP Corporation, a wholly owned subsidiary of Redcats USA, will acquire all of the outstanding shares of The Sportsman's Guide in a cash merger for a price of $31 per share. The $31 per share price represents a 20.2% premium over the three-month average trading price of $25.80 and a 14.8% premium over yesterday's closing price. The transaction values The Sportsman's Guide at approximately $265 million, including the value of outstanding stock options. The board of directors of The Sportsman's Guide has unanimously approved the merger agreement and has agreed to recommend to The Sportsman's Guide's shareholders that they vote to adopt the merger agreement and approve the merger. The transaction is expected to close during the third calendar quarter of this year, and is subject to The Sportsman's Guide shareholder approval, as well as other customary closing conditions, including the expiration of the Hart-Scott-Rodino waiting period. The transaction is not subject to financing. Gregory R. Binkley, President and Chief Executive Officer of The Sportsman's Guide, stated, "We are pleased to make today's announcement. We believe that the price is consistent with management's goal of maximizing shareholder value and we believe that Redcats USA represents a great fit for the Company, its customers, associates and managers." www.csinvesting.wordpress.com studying/teaching/investing Page 9
Eric Faintreny, Redcats USA's CEO, said, "The Sportsman's Guide is a great company, with an outstanding product range. We look forward to working with Greg Binkley, his management team and employees to take The Sportsman's Guide and its Golf Warehouse subsidiary to a further step of development." Mr. Binkley will remain CEO of The Sportsman's Guide following the merger. He and other members of The Sportsman's Guide and The Golf Warehouse senior management have entered into new employment agreements to remain with the companies post-merger. ABOUT THE SPORTSMAN'S GUIDE The Sportsman's Guide is a multi-channel direct marketer of value-priced outdoor gear and general merchandise, with a special emphasis on outdoor clothing, outdoor equipment, sporting goods, golf apparel and equipment and footwear. The company sells through both Internet Web sites and catalogs. The Company's websites include www.sportsmansguide.com, www.tgw.com, www.bargainoutfitters.com, www.baseballsavings.com and www.softballsavings.com. Investors can access information about the company at www.sportsmansguideir.com. ABOUT REDCATS USA Redcats USA is a leading catalog and online marketer of apparel and home products, operating in North America. Its primary brands are Chadwick's, Roaman's, Jessica London, KingSize and BrylaneHome. Redcats USA is a wholly owned subsidiary of the Redcats Group, the world's third largest catalog and online group in apparel and home products operating in 26 countries, through 17 brands with a staff of 20,000 associates and a turnover of 4.37 billion euros in 2005. Redcats Group is a member of the PPR group of companies. The shares of PPR S.A. are listed on Euronext Paris (#121485, PRTP.PA, PPFP). For more information, please visit www.ppr.com.
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