Briefly about FTAR:
1. FTAR operates footwear depts in 1,392 Kmart stores as of Dec 30, 2006.
2. March 2, 2004: FTAR filed for Chapter 11.
3. Feb 2, 2006: FTAR emerged from bankruptcy and repaid creditors in full with interest.
4. Amended Master Agreement with Kmart will expire at the end of 2008. Kmart is obligated to purchase shoemart inventory (but not the brands) at book value.
Liquidation Value (Based on 2006 10K)
Assets:
Cash = $101M
Account Receivables = $10.6M
Inventories = $92M
Prepaid expenses = $7.9M
Property = $20.4M (Based on Oct 2004 valuation)
Total assets = $231.9M
Liabilities:
Account payables = $50M
Accrued expenses = $27.6M
Income taxes = $0.9M
Liabilities from discontinued operations = $2.3M
Liabilities subject to compromise = $1.2M
Other long term liabilities = $26.6M
Amount due under Kmart settlement = $5.2M
Total liabilities = $113.8M
Net assets after deducting total liabilities = $118.1M
Year EBIT margin Revenue
2006 6.8% $666.7M
2005 5.1% $715.4M
2004 0.8% $800.2M
2003 4.4% $962.4M
2002 7% $1321.3M
2001 8% $1443.2M
Year 2007 2008
Estimated revenue $600M $550M
Estimated EBIT margin 5% 5%
Thus, EBIT $30M $27.5M
Estimated depreciation $6M $6M
Estimated CapEx $2M $2M
Thus, estimated cash flow $34M $31.5M
Total estimated cash flow for 2007 +2008 = $65.5M
Therefore, estimated liquidation value of FTAR at the end of 2008
= $118.1M + $65.5M
= $183.6M
No of shares = 21M
Liquidation value = $8.74/share
Further upsides above $8.74/share:
1. At the end of 2008, FTAR would still have over $110M of Net Operating
Loss. This may worth $10M to $30M to acquirer.
2. Brand value of Thom McAnn. The brand may fetch $5M to $10M in sale.
3. % of share in short is about 38%. Once the share starts advancing
north, short sellers might tumble over each other to cover their short
positions.
4. Activist hedge fund: Schultze Asset Management owned over 5% of FTAR.
They will try to influence the management to use cash in the way that
benefits shareholders.
5. Revenue estimates for 2007 and 2008 are conservative and may turn up
to be better than expected.
6. If FTAR managed to negotiate with Kmart to continue its operation
after 2008, potential upside may be huge; easily north of $12/share
based on EV/EBIT of 6.
I bought FTAR at $6.30 prior to 10K release. Based on 10Q for 3rd Qtr 2006, I estimated the liquidation value of at least $6.50/share. The results for year 2006 was much better than I predicted and I subsequently readjusted my valuation to $8.74/share according.
Best,
David
[email protected]
March 21, 2007
1. FTAR operates footwear depts in 1,392 Kmart stores as of Dec 30, 2006.
2. March 2, 2004: FTAR filed for Chapter 11.
3. Feb 2, 2006: FTAR emerged from bankruptcy and repaid creditors in full with interest.
4. Amended Master Agreement with Kmart will expire at the end of 2008. Kmart is obligated to purchase shoemart inventory (but not the brands) at book value.
Liquidation Value (Based on 2006 10K)
Assets:
Cash = $101M
Account Receivables = $10.6M
Inventories = $92M
Prepaid expenses = $7.9M
Property = $20.4M (Based on Oct 2004 valuation)
Total assets = $231.9M
Liabilities:
Account payables = $50M
Accrued expenses = $27.6M
Income taxes = $0.9M
Liabilities from discontinued operations = $2.3M
Liabilities subject to compromise = $1.2M
Other long term liabilities = $26.6M
Amount due under Kmart settlement = $5.2M
Total liabilities = $113.8M
Net assets after deducting total liabilities = $118.1M
Year EBIT margin Revenue
2006 6.8% $666.7M
2005 5.1% $715.4M
2004 0.8% $800.2M
2003 4.4% $962.4M
2002 7% $1321.3M
2001 8% $1443.2M
Year 2007 2008
Estimated revenue $600M $550M
Estimated EBIT margin 5% 5%
Thus, EBIT $30M $27.5M
Estimated depreciation $6M $6M
Estimated CapEx $2M $2M
Thus, estimated cash flow $34M $31.5M
Total estimated cash flow for 2007 +2008 = $65.5M
Therefore, estimated liquidation value of FTAR at the end of 2008
= $118.1M + $65.5M
= $183.6M
No of shares = 21M
Liquidation value = $8.74/share
Further upsides above $8.74/share:
1. At the end of 2008, FTAR would still have over $110M of Net Operating
Loss. This may worth $10M to $30M to acquirer.
2. Brand value of Thom McAnn. The brand may fetch $5M to $10M in sale.
3. % of share in short is about 38%. Once the share starts advancing
north, short sellers might tumble over each other to cover their short
positions.
4. Activist hedge fund: Schultze Asset Management owned over 5% of FTAR.
They will try to influence the management to use cash in the way that
benefits shareholders.
5. Revenue estimates for 2007 and 2008 are conservative and may turn up
to be better than expected.
6. If FTAR managed to negotiate with Kmart to continue its operation
after 2008, potential upside may be huge; easily north of $12/share
based on EV/EBIT of 6.
I bought FTAR at $6.30 prior to 10K release. Based on 10Q for 3rd Qtr 2006, I estimated the liquidation value of at least $6.50/share. The results for year 2006 was much better than I predicted and I subsequently readjusted my valuation to $8.74/share according.
Best,
David
[email protected]
March 21, 2007
