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Barel Karsan
Barel Karsan

Alco Stores Gets Bought Out

July 29, 2013

In the last two years and change, Alco Stores has been brought up on this site five separate times. Each time, the large discount at which the company traded relative to its net current assets was brought up. Last week, the price of the company's shares soared 60% as the company received a friendly buyout offer.

I can understand why this one scared investors. Retailers have high operating leverage (as a result of fixed lease requirements and minimum labour requirements), so when a retailer is barely breaking even, fears mount any drop in revenues could lead to financial disaster. But that's exactly the kind of thinking that may push Mr. Market to near suicidal levels. He was willing to sell you this company's cash/receivables/inventory (less all liabilities) for 30 cents on the dollar!

What also gave me confidence in the stock was that I believed in the turnaround plan. To me, management was doing all the right things operationally: closing unprofitable locations, raising its hurdle rate for new stores, using data to implement regional pricing, using software to improve efficiency of distribution operations etc. On that front, it's unfortunate we won't get to see how it would have turned out, as it could have a been an interesting case study.

But don't get me wrong, I'm happy with the short-term gain; I'd much rather study the cases of the companies I don't own, such as JC Penny and Sears, in order to avoid the financial risk!

Disclosure: No position

About the author:

Barel Karsan
Charlie Tian, Ph.D. - Founder of GuruFocus. You can now order his book Invest Like a Guru on Amazon.

Rating: 4.0/5 (2 votes)


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