Christopher & Banks Corp. (CBK, Financial) is a retailer that specializes in women's apparel and accessories. Founded in 1956, it operates 472 stores in 45 states. This includes 321 Missy, Petite, Women stores, 79 outlet stores, 37 Christopher & Banks stores and 35 C.J. Banks stores. Its online and retail stores allow customers to browse, buy, return or exchange their privately branded goods.
Changes not fully realized in current price
Activist investor Macellum Capital Management continues to push and realize important change, which it started in 2016. In fact, Macellum reached a settlement to install Macellum's CEO Jonathan Duskin and three new directors to the seven-person board. Macellum's slow ownership acquisition grew from 5% of shares outstanding in 2016 to 11.10%, according to the most recent 13D filed in Februrary 2017. Further, the firm added more shares after the most recent 13D, and Duskin made open market purchases. He added 232,500 shares to bring the total Macellum ownership to 4,422,457 shares.
Joel Waller, the former CEO, is now the interim president and CEO. Additionally, he serves on the board and is an investor in the Macellum Retail Opportunity Fund. Waller has 35 years of retail experience and is 77. Clearly, Macellum controls the company's future and is has incentive to maximize shareholder value. Note that Macellum's initial 13D filing in 2016 was with shares purchased over $5; Thursday's price stands at $1.21.
The company has strong mean-reverting attributes. As of January 2014, the enterprise value was $211.12 million. As of Thursday, it is $28.30 million, down 87% from that period.
The company has a strong balance sheet, however, with an Altman Z-score of 3.11, book value per share of 1.56 and current ratio of 1.47.
Christopher & Banks is oversold and a strong, unique candidate for a higher valuation.
It has also engaged in monetization of the corporate building through a sale and leaseback, with an estimated value in the low to mid-teen millions range. This compares favorably to the current enterprise value of $27.60 million.
Christopher & Banks trades below its replacement value. Stores trade for around $58,470 based on the current enterprise value of $27.60 million with 472 stores. This valuation excludes the sale (leaseback real estate deal) of the corporate building of approximately $14 million and $51.40 million in current inventory and $50.37 million in net store improvements, computers and websites.
Further, its target is a more retail-loyal demographic: adult women. Brand loyalty has been created from word of mouth and decades serving the adult women demographic exclusively. These tangible brand attributes are not easily duplicated.
Aggressive 2017 insider buying with no selling
Discounted relative and historical valuation
The new shareholder-friendly board pushed by retail activist Macellum to realize Christopher & Banks' fair value.
The company has a clean capital structure with low institutional ownership. Current inventory balance reflects a merchandise strategy for quicker inventory turns. The current quarter's $1.20 million capital expenditures compares favorably to last year's $2 million. Capex requirements are lower for future online technology investments and each store's capital requirements. In addition, Annual capex requirements are expected to be reduced by $7 million.
The company has no outstanding borrowings under the current credit facility other than open letters of credit in the normal course of business.Further, management is guiding and on track to save $5 million to $7 million in annualized SGA expenses.
Company financial snap shot on Dec. 11
Current results and turnaround progress for third quarter ended Oct. 28
Third quarter results were disappointing. Sales declined 7.7% on an average of 6.5% fewer stores compared to the same period last year. Comparable store sales declined 5% against a positive 4.5% increase last year. The unusual weather caused weakness in the warm weather category. This drop accounted for half of the negative comparison. On a positive note, once the weather normalized, performance improved. As expected, a sequential improvement in gross margins over the second quarter occurred.
Ignoring deeper details on the third quarter and instead focusing on forward expectations, management is satisfied with the progress of the turnaround. They saw significant business improvements late in October. Further, for the fourth quarter to date, comparable sales are up by mid-single digits, signaling an increase in transactions and average dollar sales compared to the same period last year.
Note that comparable-store sales increased in both outlets and e-commerce for the third quarter and have improved further in the fourth quarter to date. Management believes improved sales performance over the last several weeks is because of the progress made on strategic initiatives. Management confidently commented on the holiday season with refined inventory and marketing programs. For the fourth quarter to date, gains were partially realized from the increased fashion assortment and reduced core basic offerings.
The second strategic focus is on inventory productivity with a refined merchandise offering.
The third target is the outlet business, where comparable-store sales improved in the mid-single digits in the third quarter and are trending in the low teens so far this fourth quarter.
The fourth priority is e-commerce. This category reported another quarter of strong performance with 8.5% growth in comparable-store sales for the third quarter and trending in the mid-teens thus far this quarter. Going into the holiday season the company has both merchandise and appropriate inventory levels.
Finally, management is pleased to have seen a recent inflection point in the business. Managment's strategic actions will improve both comparable-store performance, gross margins and long-term sustainable growth.
Discounted relative valuation
Discounted historial valuation
Summary of positive attributes
For now, the market ignores the retail activist, board changes, historical and relative valuation discount, 87% enterprise value drop from 2014, strong financial position, insider buying, near-term material real estate monetization, operational turnaround and a long historical legacy since its founding in 1957.
I'm long Christopher & Banks and consider the stock a buy. But, recognize the risk with mall-based retail and the uncertainty of a full operational turnaround.
