Analyzing a stock is reading a tale of two companies and deciding whether it’s the spring of hope or the winter of despair. Blair Corporation(BL) initially caught my attention because it has no debt and trades close to its book value. Blair has a market cap of only $120 million, and its 3.8% yield looked quite attractive. Further investigation yielded the other story, the tale that explains the modest valuation.
Blair began in 1910 as a direct marketer of raincoats. The company has expanded and is a direct marketer of women’s clothing, men’s clothing and home fashions. Blair began the decade with big hopes. John Zawacki was promoted from head of women’s wear to CEO at the end of 1999, and announced ambitious plans to grow the company from its 1999 sales level of $522 million to over $1 billion by the end of the decade. In 2000, Zawacki described the company’s problem to Multichannel Merchant:
The Blair customer file has been aging for some time,” says John Zawacki, Blair’s president/CEO, who took over for Murray McComas in January. “In 1965, the average age of the Blair customer was 47; today it’s 65. We realized we had to find a way to bring that younger demographic into the fold.
To try to grow the business and move into a younger demographic, Zawacki launched the Crossing Pointe catalog, signing Jane Seymour to brand a clothing line. Crossing Pointe never gained real traction and was shut down by the company in 2005. Other attempts at starting new product lines such as a wholesale outerwear business called Allegheny Trail failed as well and were shut down.
By 2003, Zawacki had managed to grow revenues only 10%, and they would peak there at $582 million. Since then, they have fallen precipitously to only $456 million in 2005 and only $307 million in the first nine months of 2006. One thing that the company had going for it through the first half of the decade was consistent profitability. This derived largely from the company’s profitable financing division. In 2005, under pressure from activist investors, the company sold its financing arm and used the proceeds to buyback more than half of its outstanding shares at $42 per share. Since the completion of the tender offer, the stock has fallen to the low 30s as Blair has been unable to show a profit.
As the company’s revenue has plunged, it has not been able to cut costs fast enough to keep up. While it has done an excellent job of improving sourcing as cost of sales has dropped from 47.4% of total sales in 2003 to 45.4% in 2006, both advertising and G&A have surged as a percentage of net sales. Advertising has gone from 26.9% of total sales in 2003 to 30% in the first 9 months of 2006, and G&A from 23.4% to 29.1%.
Fortunately, the company’s losses aren’t too great. An improvement of a few percent on any of these items would swing the company to a profit, and in fact it showed a modest one in the Q2 2006. Unfortunately, there’s no reason to think that current management is capable of this.
Ultimately, this company needs to fix its fundamental problem. Its current business is declining as customers age, no new business is taking its place, and its fixed costs remain high. I believe that this will eventually combine in some fashion with other catalog/internet retailers so that its exisiting infrastructure could be used more fully. As far as I can tell, the company has never completed an acquistion. My bet is that the company is acquired either by a strategic buyer(IACI could be a good fit) or private equity. I might consider buying some if it fell back near its low of $23.73, but at yesterday’s close of $31.50, it’s too rich for me.
Disclosure: I own none of the stocks mentioned
What would you expect, when the company has operated for years with a board consisting of middle aged-up men who have never ventured professionally out of Warren PA, but the primary business is women’s clothes? Why not add some younger women from inside the company, or with or without Warren backgrounds who have received advanced degrees and are professionals residing outside the immediate Blair region?