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Company Profile: Federated Department Stores (FD) (obtained via Google Finance)

 

Federated Department Stores, Inc. (Federated) is a retail company operating department stores that sell a range of merchandise, including men's, women's and children's apparel and accessories, cosmetics, home furnishings and other consumer goods. During the fiscal year ended January 28, 2006 (fiscal 2005), the Company, through its divisions, operated 868 retail stores located in 45 states, the District of Columbia, Puerto Rico and Guam. During fiscal 2005, the stores were operated under the names Macy's and Bloomingdale's, and under the May nameplates, which included Famous-Barr, Filene's, Foley's, Hecht's, Kaufmann's, L.S. Ayres, Marshall Field's, Meier & Frank, Robinsons-May, Strawbridge's and The Jones Store. On August 30, 2005, pursuant to an agreement and plan of merger, dated as of February 27, 2005, by and among Federated, The May Department Stores Company (May), and Milan Acquisition LLC (a subsidiary of the Company), May merged with and into Milan Acquisition LLC.

 

Business and Management Review
1) Is the business simple and understandable?

Given the nature of the retail industry, this business is very simple. The company analyzes the market to determine purchase requirements, markets their goods, and finishes with a point of sale.

2) Does the business have a consistent operating history?

Federated has a long and fruitful history as they have become one of the largest retailers in the United States. The industry shares this legacy and continues to move forward in an attractive fashion.

3) Does the business have favorable long term prospects?

Even with increased online competition, a business line such as Federated is protected with their higher ticket goods and the type of cliental they serve. We feel confident that they will continue to enjoy the level of success of their past.

4) Is management rationale?

Management seems to be rationale in their decision making process. Particularly the acquisition of Marshall Fields under the Macy’s nameplate we feel will have long term growth potential for the company.

5) Is management candid with its shareholders?

Investor relations are in depth and comprehensive containing all relevant information a savvy investor might require.

6) Does management resist the institutional imperative?

We see no reason to question management’s decisions and are confident in saying that they do resist the institutional imperative.

Financial and Value Review
Defensive:

1) Size of firm

The firm’s market capitalization is above the $2 billion requirement. Pass.

2) Strong financial condition

With a current ratio around 1.30 the company is short of the 2.00 requirement. Fail.

3) Earnings stability

There has not been positive net income for the past ten years. Fail.

4) Dividend record

The firm has failed to pay a dividend consistently for the past ten years. Fail.

5) Earnings growth

Federated has increased their EPS by one third over the past ten years. Pass.

6) Price to earnings analysis

With a P/E ratio around 17.80 the company is below the 20 requirement. Pass.

7) Price to book analysis

The companies P/B ratio is at 1.63 which is below the 2.5 requirement. Pass.

Conclusion:

Scoring 4/8 this firm fails the test for the defensive investor and would not be recommended to be placed in that investor’s portfolio.

Enterprising:
1) Strong financial condition

Current ratio below 1.5. Fail.

2) Earnings stability

There has been positive net income for the past five years. Pass.

3) Dividend record

Company currently pays a dividend. Pass.

4) Earnings growth

Earnings are greater than five years ago. Pass.

Conclusion:

Scoring 3/4 the company passes the test for the enterprising investor and should be considered for this classification of investor.

Valuation:

 

We find a fair market price for Federated Department Stores to be around $52.

Opinion:

 

Given a current price of around $41 we would feel comfortable allowing the enterprising investor to include this security in their portfolio. We see continued growth potential and management’s decisions are in line with our long term goals.

Neither of us held a position in Federated Department Stores at the time of publication.  Also, please read our disclaimer and Our Methods.

Please register and discuss this article in our forums.  Your comments help us mold our future articles.

 

Posted by Jon at 10:18 PM | Permalink | Comments (1) | TrackBacks (0)

Company Profile:  Dillard’s Incorporated (obtained via Google Finance)

Dillard's, Inc. operates retail department stores located primarily in the southeastern, southwestern and midwestern areas of the United States. As of January 28, 2006, the Company operated 330 Dillard’s stores, selling a selection of merchandise, including men's, women's and children's apparel and accessories, cosmetics, home furnishings and other consumer goods. Most stores are located at suburban shopping malls. Customers may also purchase products online at Dillard's, Inc.'s Website. The Company also offers an online bridal registry to customers. Dillard's, Inc. operates retail department stores located primarily in the southwest, southeast and midwest. The stores are located in 29 states, with 51 stores being located in the western region, 124 stores in the eastern region and 155 stores in the central region.

Business and Management Review
1) Is the business simple and understandable?

Dillard’s is in the simple business of retail.  They purchase inventory, mark it up, and sell it.  The main issues for the industry are attracting customers and keeping inventory costs low.

2) Does the business have a consistent operating history?

The company was founded by William Dillard, in 1938 when he opened his first retail store.  Since then, the company has focused on an acquisition strategy as the industry has gone through numerous consolidation stages.  The company also focuses on advertising to attract its customers.  The operating history has been consistent, as there have been no unusual tactics used (such as being a retail business but acquiring a telephone company).

3) Does the business have favorable long term prospects?

The retail industry will continue to be around as long as we exchange goods and services; however the composition of the retail industry may change.  There have been countless mergers the last few years within the industry, and a marked move towards internet purchasing by consumers.  Store fronts are still needed as consumers need to be able to see a store’s presence and have a specific location to make returns to (if necessary).  Dillard’s seems well aware of this, as their internet site allows online shopping while they are continuing to acquire new locations.

4) Is management rational?

Management appears rational in its approach to business.  We especially like the company’s outlook on the recent major mergers of their competitors – they view it as an opportunity to attract customers who are not happy with the change in store names. 

5) Is management candid with its shareholders?

Dillard’s has an average investor relations page, and we would like to see a more informative letter to shareholders.  The letter in the latest annual report seems generic, focused on overall goals but avoids discussing tactics in detail – something investors deserve to hear from management.

6) Does management resist the institutional imperative?

We have no reason to doubt that management has resisted the institutional imperative. 

Financial and Value Review
Defensive:
1) Size of firm

At a market cap of over $2.5 billion, the company passes the requirement of $2 billion.

2) Strong financial condition

The company’s current ratio is not suitable for the defensive investor.

3) Earnings stability

The company has achieved a positive net income for 10 years.  Pass.

4) Dividend record

Dillard’s has paid a dividend for over 10 years.

5) Earnings growth

Earnings per share have not grown suitably in the last 10 years for the defensive investor.

6) Price to earnings analysis

With a PE ratio (using our Methods) of 28.60, the requirement of under 20 is not met.  Though the trailing 12-month PE ratio is 14.18, we maintain that our version of the PE ratio focusing on long-term performance, is the better statistic and should be used in determining investment opportunities.

7) Price to assets analysis

Since the PB ratio is 1.08, it makes up for the high PE ratio, and the company passes the final test.

Overall

Having passed only 5 of the required 7 tests for the defensive investor following Benjamin Graham’s value investing strategy, we do not believe Dillard’s is suitable for the defensive investor.

Enterprising:
1) Strong financial condition

The company’s current ratio is sufficient for the enterprising investor.  Pass.

2) Earnings stability

The company has achieved a positive net income for over 5 years.  It passes the test.

3) Dividend record

The company currently pays a dividend.  Pass.

4) Earnings growth

Earnings are greater today than they were 5 years ago.

Overall

We find the company to be suitable for the enterprising investor.

Valuation:

Our valuation model finds a fair value to be around $43. 

Opinion:

Since the company is currently trading at $33, the company seems fairly valued (it does not quite meet our margin of safety to be considered undervalued), but may be a suitable investment for a long term enterprising investor.

Neither of us held a position in Dillard’s Incorporated at the time of publication.  Also, please read our disclaimer and Our Methods.

This is the second part of our study of the Department Stores sector.  Please come back in the next couple weeks for reviews of more companies within the sector.

 

 

Posted by Ben at 09:16 AM | Permalink | Comments (2) | TrackBacks (0)

Company Profile: Bon-Ton Stores (BONT) (obtained via Google Finance)
The Bon-Ton Stores, Inc. operates department stores in the United States. The Company offers an assortment of brand name fashion apparel and accessories for women, men and children, as well as footwear, cosmetics, home furnishings and other goods. On March 5, 2006, The Bon-Ton Stores, Inc. completed the acquisition of Northern Department Store Group (NDSG). NDSG consists of 142 stores located in 12 states and related operations. Following the acquisition of NDSG, the Company operates 279 stores in secondary and metropolitan markets in 23 Northeastern, Midwestern and Great Plains states under the Bon-Ton, Bergner's, Boston Store, Carson Pirie Scott, Elder-Beerman, Herberger's and Younkers nameplates.

Business and Management Review
1) Is the business simple and understandable?

Bon-Ton Stores is in the business of department retail and it is a very easily understandable industry. The company acquires merchandise and places a retail mark up that generates the revenue for the item sold. The main expenses for a company of this type include overhead rent (or mortgage if property owned) and payroll for human labor.

2) Does the business have a consistent operating history?

The retail business has been around for as long as individuals traded one product for another. More specifically, department retailing has been extremely successful for the past century.

3) Does the business have favorable long term prospects?

As long that an individual chooses to purchase their products through a brick and mortar storefront, Bon-Ton Stores has a very favorable outlook. With that said there is an ever expanding competition from virtual merchants selling through the internet that may erode market share in the future. There will always be the convenience factor, however, with shopping at a brick and mortar store and we feel that they will continue to have a position in commerce.  

4) Is management rationale?

Management seems to be acting rationally and their financial position proves the point. The company is outpacing the industry in both EPS growth and sales growth over the past five years. The margins the company is operating under exceed the industry significantly. There is some worry with the amount of debt the company is holding mixed with the lagging indicator of capital spending making one question what growth prospects are to be had as they may be over leveraged.  

5) Is management candid with its shareholders?

Investor relations are strong as the company is presenting the relevant information that investors require.

6) Does management resist the institutional imperative?

We are satisfied with the continued growth of the company, but we question if this growth is sustainable long term given the indicators mentioned above.

Financial and Value Review
Defensive:

1) Size of firm

The company is below the $2 billion requirement and fails the test.

2) Strong financial condition

With a current ratio around 1.80 the firm falls below the 2 requirement and fails the test.

3) Earnings stability

There has been positive net income for the past ten years and thus passes the test.

4) Dividend record

Dividends have not been paid for the past ten years and the test is failed.

5) Earnings growth

There has been and increase in EPS of one third over the past ten years. Pass.

6) Price to earnings analysis

With a P/E ratio around 30 the company is above the requirement of 20. Fail.

7) Price to book analysis

The company barely passes this test with a P/B ratio of 2.49 which is below the 2.5 requirement. Pass.

Conclusion:

Scoring only 3/8 the we would not recommend this firm to be placed in the defensive investor’s portfolio.

Enterprising:
1) Strong financial condition

Current ratio is above 1.5. Pass.

2) Earnings stability

Positive net income for the past five years. Pass.

3) Dividend record

Currently pays a dividend. Pass.

4) Earnings growth

Earnings are greater than five years ago. Pass.

Conclusion:

Scoring 4/4, the firm passes the test for the enterprising investor and should be considered for this type of investor.

Valuation:

We find a fair market price for Bon-Ton Stores to be $33.

Opinion:

With a current price around $36.50 we would feel comfortable allowing the enterprising investor to consider this security. We see growth potential and find the current price to be attractive relative to our valuation.

Neither of us held a position in Bon-Ton Stores at the time of publication.  Also, please read our disclaimer and Our Methods.

Please register and discuss this article in our forums.  Your comments help us mold our future articles.

 

 

Posted by Jon at 10:23 PM | Permalink | Comments (0) | TrackBacks (0)

Industry Review:  Railroads

The last couple of weeks we have looked at eight different companies within the railroad industry.  Here, we look to present a summary of those reviews and directly compare the companies through common-sized statements.

Specifically, we looked at: 

Monday, January 8 - Jon - Burlington Northern Santa Fe (BNI)
Tuesday, January 9 - Ben - Union Pacific Corporation (UNP)
Wednesday, January 10 - Jon - Kansas City Southern (KSU)
Thursday, January 11 - Ben - Providence & Worcester Railroad Co (PWX)
Monday, January 15 - Jon - The Greenbriar Companies (GBX)
Tuesday, January 16 - Ben - Genesee & Wyoming Inc. (GWR)
Wednesday, January 17 - Jon - Canadian National Railway (CNI)
Thursday, January 18 - Ben - Norfolk Southern Corporation (NSC)

	BNI	UNP	KSU	PWX	GBX	GWR	CNI	NSC
Defensive?	No	No	No	No	No	No	No	No
Enterprising?	Yes	Yes	No	Yes	Yes	No	Yes	Yes
Valuation	$67	$95	$26	$18	$31	$34	$71	$47
Current Price	$77.25	$95.25	$30	$19	$26.50	$26.50	$44	$52

 Here is a look at the common-sized Interim Balance Sheet for all of the companies:

 

	BNI	UNP	KSU	PWX	GBX	GWR	CNI	NSC
	9/30/2006	9/30/2006	9/30/2006	9/30/2006	11/30/2006	9/30/2006	9/30/2006	9/30/2006
Assets
Cash & ST Investments	0.27	1.98	2.64	2.08	1.57	21.78	0.25	3.09
Receivables (Net)	2.53	2.12	7.64	4.04	13.43	10.23	4.56	3.95
Total Inventories	1.47	1.17	1.78	1.79	25.59	1.06	0.9	0.61
Prepaid Expenses	-	-	-	-	-	-	-	-
Other Current Assets	1.91	4.53	0.83	0.35	0	1.7	0.82	0.88
Current Assets - Total	6.18	6.5	12.89	8.27	40.59	34.77	6.54	8.53
Investment In Unconsolidated Subsidiaries	-	2.33	-	0	-	0.41	-	5.03
Property Plant & Equipment - Net	87.13	89.75	53.77	91.73	38.66	49.53	89.16	80.72
Property Plant & Equipment - Gross	-	118.23	-	-	-	-	-	-
Less: Accumulated Depreciation	-	28.48	-	-	-	-	-	-
Other Assets	6.69	3.75	33.35	0	20.76	15.29	4.3	10.75
Intangible Assets	-	-	30.29	0	17.37	14.35	4.3	-
Total Assets	100	100	100	100	100	100	100	100
Liabilities