12/13/2017

Deep Value with Women's Apparel: Christopher & Banks Corp


Christopher and Banks Corp is a retailer that specializes in women's apparel and accessories. Founded in 1956, it operates 472 stores in 45 states. This includes 321 Missy, Petite, Women ("MPW") stores, 79 outlet stores, 37 Christopher and Banks ("CB") stores, and 35 C.J. Banks ("CJ") stores. Their online and retail stores allow customers to browse, buy, return or exchange their privately branded goods.

Changes Not Fully Realized In Current Price

Activist investor, Macellum Capital Management continues to push and realize important change starting in 2016. In fact, Macellum reached a settlement to install Macellum's CEO Duskin and three new directors to the seven-person CBK board. Macellum slow ownership acquisition from 5% in 2016 to the most recent 13D filed on 02/2017 for 4,189,957 shares or 11.10% of shares outstanding. Further, they added more shares after the most recent 13D with open market purchases by Macellum CEO and CBK board member Jonathan Duskin. He added 232,500 shares to bring the total Macellum ownership at 4,422,457.

Joel Waller former CEO is now the Interim President and Chief Executive Officer.  Additionally, he serves on the board and is an investor in Macellum Retail Opportunity Fund. Mr. Waller has 35 years of retail experience and is 77. So clearly Macellum controls the company's future and is incentivized to maximize shareholder value. Note that Macellum initial 5% 13D filing in 2016 was with shares purchased over $5 versus today price of $1.21.

Strong mean reverting attributes. As of January 2014, the enterprise value was 211.12M. Today its 28.30M down 87% from 01/2014. But, the company has a strong balance sheet, Z score of 3.11, cash per share of .47, book value per share of 1.56, current ratio = 1.47. CBK is oversold down 87% from January 2014 and is a strong unique candidate for a higher valuation.

Monetization of the corporate building (sale-leaseback) with an estimated value in the low to mid-teen million range. This compares favorably to the current enterprise value of 27.60M.

CBK trades below its replacement value. Stores trade for around 58.47K based on the current enterprise value of 27.60M with 472 stores. This valuation excludes the sale (leaseback real estate deal) of the corporate building of ~14M and 51.40M in current inventory and 50.374M in net store improvements, computers, and websites.Further, their target is a more retail loyal demographic, adult women. Brand loyalty created from word of mouth and decades serving exclusively the adult women demographic. These tangible and brand attributes are not easily duplicated.

Aggressive 2017 insider buying no selling

























Discounted relative and historical valuation (See below)

The new shareholder-friendly board pushed by retail activist Macellum to realize CBK's fair value.

Clean capital structure with low institutional ownership. Current inventory balance reflects merchandise strategy for quicker inventory turns. The current quarter's 1.20M cap ex-compares favorably to last year's 2M. Capex requirements are lower for future online technology investments and store's capital requirements. Expected annual Capex requirements to be reduced by 7M. No outstanding borrowings under the current credit facility other than open letters of credit in the normal course of business.Further, management is guiding and on track to save 5 to 7 million in annualized SGA expenses.




Company Financial Snap Shot on 12/11/17





























Current Q3 (10/28/17) results and turnaround progress.

Quarter 3 results were disappointing. Sales declined 7.7% on an average of 6.5% fewer stores compared to the same period last year. Comparable store sales declined 5% against a positive 4.5% increase last year. The unusual weather caused weakness in the warm weather category. This drop accounted for half of the negative comparison. On a positive note, once the weather normalized, performance improved. As expected,  a sequential improvement in gross margins over the second quarter.

I will ignore deeper details on Q3 and instead focus on forward expectations. Management satisfied with the progress of the turnaround. They saw significant business improvements late in October. And, for the fourth quarter-to-date, comparable sales are up mid-single digits signaling an increase in transactions and average dollar sales compared to the same period last year.

Note that comp sales increased in both outlets and e-commerce for the third quarter and have improved further in the fourth quarter-to-date. Management believes improved sales performance over the last several weeks is because of the progress made on strategic initiatives. Management confidently commented on the holiday season with refined inventory and marketing programs. For the fourth quarter to date, gains partially realized from the increased fashion assortment and reduced core basic offerings.

The second strategic focus is inventory productivity with the refined merchandise offering. The third target is the outlet business, which comps improved in the mid-single digits in the third quarter and is trending in the low teens so far this 4th quarter. The fourth priority is e-commerce. This category reported another quarter of strong performance with 8.5% growth in comp sales for the third quarter and is trending mid-teens thus far this quarter. Going into the holiday season they have both merchandise and appropriate inventory levels. Finally, management is pleased to have seen the recent inflection point in the business. Managment's strategic actions will improve both comp performance, gross margins and long-term sustainable growth.




Discounted Relative Valuation





















Discounted Historial Valuation





















Summary of positive attributes:
For now, the market ignores retail activist, board changes, historical and relative valuation discount, 87% enterprise value drop from 2014, strong financial position, insider buying, near-term material real estate monetization, operational turnaround, and a long historical legacy founded in 1957.


I'm long CBK and consider the stock a buy.But, recognize the risk with Mall based retail and the uncertainty of a full operational turnaround.


Long: CBK

1 comment:

Anonymous said...

Your analysis on CBK is good and the probability of being right is very high. Very detailed analysis and in depth understanding. Wish you the best on your journey of compounding.