November 26, 2014

Doug Kass long BONT (Bon-Ton Stores)

The future looks much brighter. Bon-Ton Stores (BONT) reported disappointing results for the third quarter -- but, as I will discuss, it constituted the last challenging comparison for the retailer.

Comparable-store sales dropped by 0.8%. The end of the quarter was weak, owing to the warm weather -- something that was an industry-wide phenomenon.

As previously mentioned, management is encouraged by the strength of November sales momentum.

The company's projection on earnings before interest, taxes and depreciation has been reduced to a bit more than $150 million. But my guess is that Bon-Ton will beat that forecast, since last year's results were severely impacted by holiday blizzards.

Inventories and expenses are nicely in control, and the company's online business is progressing well. Third-quarter EBITD declined by $10 million -- to $28 million -- but that figure was ahead of 2011 levels. 

Sears' (SHLD) woes should also benefit Bon-Ton, but the company must gain some market share vs. Kohl's (KSS) and J.C. Penney (JCP) .

Moreover, with the calendar more favorable, Bon-Ton should be able to comfortably beat the conservative guidance registered on the conference call. The multiple on enterprise value now stands at the low end of the company's historic range -- at 7.5x. That is appropriate in this business, but it also reflects what I think is likely a bottom, and a peak in seasonal borrowings.

The debt-to-EBITD ratio is above 6x, but borrowing costs are excellent and free cash flow exceeds $30 million -- even at this depressed level of business. Finally, new CEO Kathy Bufano (and her team) should make for an uptick from the prior regime, which failed to stem consistent market-share losses. I added to my Bon-Ton position yesterday on weakness in the shares. 

 Kass was long BONT at article publication time