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125 Year Old Retailer: A Great Long Term Play

February 06, 2014 | About:

Belk Inc. (BLKIA)(BLKIB) is a mid to upscale department store chain founded by William Henry Belk in 1888. The store is the largest family-owned department store chain in the U.S. Also, the company is in its third generation of Belk family leadership. The company stores and website offer national brands and private label fashion apparel. Belk has been on an agressive expansion, store remodeling, rebranding of legacy stores and expanding into new markets.

Flagship Locations

The chain has five flagship locations, and plans to add two more flagship location in 2014 in Dallas, Texas, and Huntsville, Ala.

  • SouthPark Mall: In Charllotte, N.C., and houses chain's largest store with 330,000 square feet.
  • Phillip Plaza: In Atlanta, Ga., and houses the chain's second flagship store.
  • Riverchase Galleria: In Birmingham, Ala., and houses the chains third flagship store.
  • The Summit: In Birmingham, Ala., and where Belk converted into Belk's Fourth Flagship in 2007.
  • Crabree Valley Mall: In Raleigh, N.C., and where Belk built a 236,000-square-foot store in 1972.
  • Galleria Dallas: In Dallas, Texas, and will open sixth flagship store.
  • Columbiana Centre: In Columbia, S.C., is where Belk will put their 250,000 square-foot store by 2015.

Business History

Belk was founded in Monroe, N.C., by William Henry Belk in 1888. Their store grew steadily throughout its early years by aggressive advertising and bargain sales in the South. The company introduced new practices which were uncommon at that time, like clearly marking prices, accepting only cash rather than extending credit, and allowing customers to return and exchange what they have bought.

When William Henry Belk died in 1958, the firm owned nearly 400 stores in 18 states. As with most mult--generational family-owned businesses, the shares are diluted among many children and grandchildren where most of them have never worked at the company and only want their dividends. These heirs created partnerships and corporations to manage their shares, and some of them sold their shares to Belk's competitors.

Over the decades, Belk's corporate structure grew more complex, and some of the stores are independently owned. Independent Belk stores by the 1960s totaled 362. These stores lacked cohesive strategy. Finally, John and Tom Belk gained majority ownership of the many Belk corporations and set about merging them. By 1989, Belk had reduced the 362 independent corporations to 112. It wasn't easy and there were some lawsuits along the way. In 1997, there was full consolidation of the many independent stores into one corporation. Once this was achieved the new company went on an moderzing and expanding spree.

Financials

Belk brought in about $4 billion in revenue and $188 million in profits in 2012, with the company's revenue growth outpacing their competitors. The company's sales growth in 2002 to 2012 was 5.85%, outpacing their competitors average of 4.87%. Total sales grew by 5.3% to $3.7 billion compared to the prior year, the eight consecutive year with year-over-year increases along the way. Net income increased by 43.5% from $127.6 million to $183.1 million, compared to the prior year. These increases came from higher sales, improved margins, expense leverage and deferred tax valuation allowance.

The company maintains a strong balance sheet with $450 million in cash, increased their dividends and buying back outstanding shares. Starting in fiscal year 2011, Belk over the last five years has invested $600 million in a number of key initiatives. Belk has invested $270 million in store improvement over a three-year period beginning in 2011. The company ecommerce site contributed $75 million in sales in the last years, a 108% increase from the prior year. Belk plans to invest about $53 million ecommerce over a three-year period. Also Belk is investing $4.5 million to open a new 512,000 square-foot ecommerce fulfillment center.

Belk's Selected Financial Data:

Financials in Thousands, expect in per share amount January 28, 2012 January 29, 2011 January 30, 2010 January 31, 2009 February 2, 2008
Revenues $3,699,592 $3,513,275 $3,346,252 $3,499,423 $3,824,803
Cost of goods sold 2,461,515 2,353,536 2,271,925 2,430,332 2,636,888
Goodwill Impairment       326,649  
Depreciation and amortization expense 122,761 140,239 159,388 165,267 159,945
Operating income (loss) 300,910 245,981 147,441 (232,643) 198,117
Income (loss) before income taxes 250,098 195,871 97,190 (283,281) 138,644
Net Income (loss) 183,148 127,628 67,136 (212,965) 95,740
Basic net income (loss) per share 4.04 2.72 1.39 (4.35) 1.92
Diluted net income (loss) per share 4.02 2.71 1.39 (4.35) 1.92
Cash dividends per share 0.550 0.800 0.200 0.400 0.400
Selected Balance Sheet Data:          
Account Receivable, net (1) 39,431 31,119 22,427 34,043 65,987
Merchandise Inventory 887,029 808,503 775,342 828,497 932,777
Working Capital 845,418 924,450 986,234 808,031 750,547
Total Assets 2,514,216 2,389,631 2,582,575 2,503,588 2,851,315
Long-Term Debt and Capital lease obligation 523,679 539,239 688,856 693,190 722,141
Number of Stores at the end of period 303 305 305 307 303
Comparable stores net revenue increase (decrease) on a 52 versus 52 week basic 5.5% 5.1% (4.6%) (8.7%) (1.1%)

Valuation

Using EV/EBITDA and EV/EBIT valuation metrics is the best way to value Belk compared to its competitors. Belk's competitors' average EV/EBITDA of 7.77 is higher than Belk at 5.34x EV/EBITDA. Also its competitors' average EV/EBIT of 11.31 is higher than Belk at 7.23x EV/EBIT. These valuation metrics show that Belk is undervalued compared to there competitors. On the other hand the valuation discount is entirely legitmate given Belk's extreme illiquidity.

Acquiring shares of Belk is extremely difficult and may get even more difficult as the company buys back its outstanding shares. During the last decade Belk has bought back 25% of its shares outstanding. The company will become more liquid over time as ownership in the company transfers to another generation of Belk family members. This creates an investment opportunity for those who want long-term value.

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Cody Eustice

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