March 18, 2014

Doug Kass on Bon Ton shares

Bon Ton Stores is a retailer based in York, Penn. The company operates 270 department stores, principally in the Midwest and Northeast. It offers brand-name fashion apparel and accessories for women, men and children, as well as cosmetics, home furnishings, footwear and other goods. Bon Ton operates under Bon-Ton, Bergner's, Boston Store, Carson's, Elder-Beerman, Herberger's, and Younkers nameplates. 

[Recently] Bon Ton Stores' shares sold off by 10%, reflecting the departure of company CEO Brendan Hoffman (for personal reasons). The decline was not due to the unexpected drop in results, as most of its stores are in areas of the country that were exposed to the bitter weather over the last two months.

I have initiated a buy of Bon Ton at $9.85 per share. 

I will have a more extensive analysis on Bon Ton early next week, but the following factors attract me to this name: 

The departure of the company's CEO likely occurred because of his desire to return to his family in New York. There was nothing untoward about the announcement.

Given Bon Ton's store locations, the disappointing results announced yesterday should not come as a surprise.

Bon Ton's shares now possess an attractive reward-risk ratio given yesterday's 10% share-price drop. 

While Bon Ton is debt-laden, the shares trade at only about 4x earnings before interest, taxes, depreciation and amortization, and the company is generating free cash flow. Importantly, the company has mentioned inventories well in the recent sales downturn.

Thomas Grumbacher, the company's chairman, is 75 years old and owns nearly 900,000 shares. Given his age and the recent management announcement, he might be incented to look at exit strategies in the period ahead.

I value Bon Ton at around $15 to $16 in a private transaction -- about 50% higher than Tuesday's close of $9.80 -- which I consider likely in 2014. Given's Bon Ton's geography, Dillard's  (DDS) is the most obvious buyer of the company.

At the time of original publication, Kass was long BONT and TZA.

Article originally published on March 12 on