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(B)(N) BONT Bon-Ton Stores Incorporated

August 12, 2014
Courtesy: Bon-Ton Stores Incorporated

Courtesy: Bon-Ton Stores Incorporated

Drama. The US retail industry of bricks-and-mortar stores, continues to be in a “sorry state”, and is even “sorrier” now than it was when we looked at it six months ago; please see our Posts “(B)(N) The U.S. Retail Value Trap” and “(B)(N) Shopping In America“.

But even though the “stock market” can’t help these stores, the “bottom-feeders” and “extreme value seekers” continue to hang-on in the hope of a “white knight” who might make a difference and “blow-up” the stock price for them – which makes  it more expensive to obtain a controlling or ownership interest in the stores, and “fix them” if they can be fixed, affecting the interests of thousands of employees, and suppliers, and millions of customers (The Street, August 10, 2014, Still Bullish on Bon-Ton: Best of Kass); please see Exhibit 2 below.

If there are no buyers for the stocks, or the stores, then the stock prices will drift downwards to zero, reflecting the “liquidity” needs of their owners, but it’s unlikely that an investor will acquire the companies for those low, low, prices, because the bond-holders also have an interest, and there’s value in the inventory and fixed assets and, possibly, the real estate, and, of course, the hedge-funds and risk arbitragers, and LWPs (“lawyers-without-portfolio”) will all want theirs.

What are you doing over there?

What are you doing over there?

Hopefully, this sounds sufficiently dreary that investors – those who want 100% capital safety, 100% liquidity, and a hopeful but not necessarily guaranteed return above the rate of inflation – will get theirs where it’s to be gotten, in the (B)-class companies of the major markets, which are the only ones that we’ll buy and hold.

But we’re trying to understand how the other half lives, and why?

Of the five stores in our survey, only Best Buy made money last year – and that would have surprised a lot of people – and it also boosted the stock prices of the lot by +52% (all by itself), but has waned recently by as much as minus(-30%) and currently, minus (-24%); please see Exhibit 1 and Figure 1.1 below.

Exhibit 1: (B)(N) The U.S. Retail Value Trap – Fundamentals

U.S. Retail Value Trap - Fundamentals

U.S. Retail Value Trap – Fundamentals

Figure 1.1: (B)(N) US Retail Value Trap - Risk Price Chart - With Best Buy

Figure 1.1: (B)(N) US Retail Value Trap – Risk Price Chart – With Best Buy

With Best Buy, the U.S. Retail Value Trap (of five companies) gave a thundering performance last year, as far as the stock prices go, but have weakened somewhat so far this year; please see Figure 1.1 on the left.

Without Best Buy, they took a nosedive (Figure 1.2), but it looks like they’ve “bottomed out”.

Figure 1.2: (B)(N) US Retail Value Trap - Risk Price Chart - Without Best Buy

Figure 1.2: (B)(N) US Retail Value Trap – Risk Price Chart – Without Best Buy

But we might have said that in 2012, and we would have been wrong because these (four) companies lost $3.7 billion (earnings) and 24% of their market value last year, and a further 16% so far this year, but they haven’t hit zero yet, and the aggregate market value is still $6.9 billion; please see Exhibit 1 above for the details, and Figure 1.2 on the left for the picture.

However, the net worth (shareholders equity) is down to $4 billion, and the liabilities, (P), are $27 billion and exceed “what is owed to them”, (R), by $8 billion, which is twice their net worth.

Mr. Kass (ibid, The Street) has written them all off (including Best Buy), except for Bon-Ton, for which he sees an $8 downside and $15 upside, which seems to make it look worthwhile to him, although the $8 downside would drop the price from the current $9.50 to $1.50, from which it might have a $23 upside, possibly; we don’t know because there seems to be no reason for the volatility of the stock price that is shown in Exhibit 2, below.

After all, “seasonal issues” are really all about the company, and the “stock market” just imagines these things. However, the companies can’t keep losing money every year, and there’s not much more ($4 billion) to lose before the shareholders equity hits zero, or less, and there aren’t many of those (only ten in the S&P 500, and their aggregated net worth of minus (-$30 billion) is nothing in the $7 trillion of the S&P 500).

However, it is noteworthy that their “future net worth”, (N*), is $34 billion, compared to their current net worth of $4 billion; please see Exhibit 1 above. What that means, in the Theory of the Firm, is that the “trade” that these companies have developed is worth 8× its “face value” (N) and, accordingly, there is “negative risk” in (N) with respect to (N*) (-1.14 = 1+log(N/N*)) in the same way as there is “negative dividend risk” if the payout rate is less than 36.8% of the earnings; please see our Post, “(P&I) Dividend Risk & Dividend Yield” to see how that works, and for more examples.

To put it another way, these companies, in aggregate, and even each of them (please see Exhibit 1), have the ability to return to profitability by working their trading connections, should they have enough time to do it.

Exhibit 2: (B)(N) BONT Bon-Ton Stores Incorporated – Risk Price Chart

(B)(N) BONT Bon-Ton Stores Incorporated

(B)(N) BONT Bon-Ton Stores Incorporated

Bon-Ton Stores Incorporated is a regional department store operator offering an assortment of brand-name fashion apparel and accessories for women, men and children as well as cosmetics, home furnishings and other goods.

From the Company: The Bon-Ton Stores Incorporated, through its subsidiaries, operates department stores in the United States. Its stores offer brand-name fashion apparel and accessories for women, men, and children, as well as cosmetics, home furnishings, footwear, and other goods. As of April 3, 2014, the company operated 270 department stores comprising 10 furniture galleries in 25 states in the Northeast, Midwest, and upper Great Plains under the Bon-Ton, Bergner’s, Boston Store, Carson’s, Elder-Beerman, Herberger’s, and Younkers nameplates. The Bon-Ton Stores, Inc. was founded in 1898, has 27,000 employees, and is headquartered in York, Pennsylvania.

For more information and additional guides to the theory, please see our Posts “(P&I) The Process – The 1st Real Dollar” which shows how a “currency” gets its value from the “subsistence economy” at the Company D modality, and “(P&I) The Process – The Guns of August” which explains how that modality actually “works”.

For more applications of these concepts please see our Posts which rely on the Theory of the Firm developed by the author (Goetze 2006) which calibrates The Process to the units of the balance sheet and demonstrates the price of risk as the solution to a Nash Equilibrium between “risk-seeking” and “risk-averse” investors within the demonstrated societal norms of risk aversion and bargaining practice. And for more on The Process, please see our Posts The Food Chain and The Process End-Of-Process.

And for more information on real “risk management” and additional references to the theory and how to read the charts and tables, please see our Post, The RiskWerk Company Glossary; we’ve also profiled hundreds of companies in these Posts and the Search Box (upper right) might help you to find what you’re looking for.

And for more on what risk averse investing has done for us this year, please see our recent Posts on The S&P TSX “Hangdog” Market or The Wall Street Put or specialty markets such as The Dow Transports & Utilities or (B)(N) The Woods Are Burning, or for the real class actionLa Dolce Vita – Let’s Do Prada! and It’s For You, Dear on the smartphone business.

And for more stocks at high prices, The World’s Most Talked About Stocks or Earnings Don’t Matter – NASDAQ 100. And for more on what’s Working in AmericaBig OilShopping in America or Banking in America, to name just a few.

Postscript

We are The RiskWerk Company and care not a jot for mutual funds, hedge funds, “alternative investments”, the “risk/reward equation” and every other unprovable artifact of investment lore. We have just one product

The Perpetual Bond
Alpha-smart with 100% Capital Safety and 100% Liquidity
Guaranteed
With No Fees and No Loads on Capital

For more information on RiskWerk, please follow the Tags or Categories attached to this Letter or simply enter Search for additional references to any term that we have used. Related data may be obtained from us for free in a machine readable format by request to RiskWerk@gmail.com.

Disclaimer

Investing in the bond and stock markets has become a highly regulated and litigious industry but despite that, there remains only one effective rule and that is caveat emptor or “buyer beware”. Nothing that we say should be construed by any person as advice or a recommendation to buy, sell, hold or avoid the common stock or bonds of any public company at any time for any purpose. That is the law and we fully support and respect that law and regulation in every jurisdiction without exception and without qualification to the best of our knowledge and ability. We can only tell you what we do and why we do it or have done it and we know nothing at all about the future or the future of stock prices of any company nor why they are what they are, now. The author retains all copyrights to his works in this blog and on this website. The Perpetual Bond®™ is a registered trademark and patented technology of The RiskWerk Company and RiskWerk Limited (“Company”) . The Canada Pension Bond®™ and The Medina Bond®™ are registered trademarks or trademarks of the Company as are the words and phrases “Alpha-smart”, “100% Capital Safety”, “100% Liquidity”, ”price of risk”, “risk price”, and the symbols “(B)”, “(N)” and N*.

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