Free Annual Reports
Greek Investments Hits The Beach
In March 2010, the Konstantinu clan, a little-known Greek family that was making some large investments in sputtering American businesses like Ruby Tuesday's (NYSE:RT) and Pier 1 Imports (NYSE:PIR), could seemingly do no wrong. Seven months later they're back at it, accumulating a 13% stake in Pacific Sunwear (Nasdaq:PSUN) since September. Investors should strongly consider buying the the Newport Beach action sports retailer that the Konstantiu's holding company, Greek Investments Inc., has taken interest in.
IN PICTURES: 20 Tools For Building Up Your Portfolio
A Mixed Record
Since March, Greek Investments has seen some serious capital appreciation from both Pier 1 Imports and Ruby Tuesday's, which are up 43.8% and 20.1% respectively. Since some of their other investments haven't done nearly as well, it's a good thing Pier 1 and Ruby Tuesday's happen to be their biggest investments to date. On these alone, the family has unrealized investment gains of $50.5 million since March 22. Can they catch lightning in a bottle a third time? I believe they can.
Greek Investments Holdings - Stock Return March 22, 2010 to November 8, 2010
On the Bright Side
There's no way to sugar coat Pacific Sun's performance in recent years. It's working on a fourth consecutive year of negative numbers, and given its $54 million operating loss in the first six months of 2010, it'll likely set a record for the entire year when the results are announced sometime in February or March. Why exactly are the Konstantinu's accumulating such a large position in a retail operation that obviously has many flaws? The potential payoff should a turnaround occur would be enormous.
At one time, Pacific Sun's gross margins were upwards of 36%, its revenues above $1.3 billion and its stock at an all-time high of $29.05. If its stock were to hit that mark once more, assuming Greek Investments maintained current holdings, the Konstantinu's would be sitting on $209 million in profits. That's not a bad return on a $54 million investment. Of course, the turnaround is still a long way off at this point.
Keys to Turnaround
Pacific Sun brought in Gary Schoenfeld in June 2009 to turnaround the ailing retailer. Schoenfeld, along with his dad Walter, did the same thing for Vans in the 1990s. Sixteen months in and it's clear this task isn't an easy one. However, these things often take time. Bill McComb, CEO of Liz Claiborne, is into his fourth year of a multi-layered corporate reinvention that still has a ways to go. Schoenfeld's made a bunch of key hires, some of which have worked out while others haven't. In January, the company hired Robert Cameron as its chief marketer and on October 25, less than one year into the job, let him go. Hopefully, Paula Lentini, the Senior VP of Retail hired in April will last beyond the Christmas season.
Schoenfeld has a basic plan that includes reconnecting with heritage brands like Fox, Hurley and Roxy; getting the right talent in place which sometimes takes longer than planned, better merchandising and buying, improving the customer experience, marketing its key brands more effectively and localizing its offerings to meet the needs of customers in different parts of the country. All of these have to come together before the turnaround can take hold. Clearly, it's not making enough progress on these fronts.
Valuation
This is where the investment begins to make sense. I picked rival Zumiez (Nasdaq:ZUMZ) in August 2009 because its stock was trading near historical lows and since then has doubled in price. While Pacific Sun's situation today isn't nearly as rosy as Zumiez in 2009, there is still a compelling valuation argument. For instance, Pacific Sun's market cap is currently 1.5 times its net tangible assets compared to 4.5 times for Zumiez. In terms of sales, Pacific Sun's price-to-sales ratio is 0.39 compared to 1.96 for its more successful competitor. Frankly, with no debt and still generating positive free cash, I see current book value per share of $3.85 as the floor on Pacific Sun's stock price. Therefore, the Konstantiu's are looking at a potential downside of $20 million, which is an acceptable risk in my opinion.
The Bottom Line
While the current situation at Pacific Sun doesn't suggest a near-term improvement in the stock price, it's clear that the Konstantinus believe that in the long term, it's likelier to rise above $6 then fall below $4. It's a risky bet that likely will pay dividends for the up-and-coming value investors. (To read the original article on the Greek portfolio, check out Playing The Greek Portfolio.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
IN PICTURES: 20 Tools For Building Up Your Portfolio
A Mixed Record
Since March, Greek Investments has seen some serious capital appreciation from both Pier 1 Imports and Ruby Tuesday's, which are up 43.8% and 20.1% respectively. Since some of their other investments haven't done nearly as well, it's a good thing Pier 1 and Ruby Tuesday's happen to be their biggest investments to date. On these alone, the family has unrealized investment gains of $50.5 million since March 22. Can they catch lightning in a bottle a third time? I believe they can.
Greek Investments Holdings - Stock Return March 22, 2010 to November 8, 2010
|
Company |
Total Return |
|
Pier 1 Imports (NYSE:PIR) |
43.8% |
|
Ruby Tuesday\'s (NYSE:RT) |
20.1% |
|
Tween Brands/Dress Barn (Nasdaq:DBRN) |
(7.8%) |
|
South Financial |
(58.8%) |
|
BFC Financial (OTCBB:BFCF) |
(34.0%) |
|
Note 1: South Financial was acquired by TD Bank May 17, 2010 for $0.28 a share. Note 2: The return for Dress Barn assumes Greek Investments held onto shares after buyout. They likely didn\'t but aren\'t required to disclose. |
|
On the Bright Side
There's no way to sugar coat Pacific Sun's performance in recent years. It's working on a fourth consecutive year of negative numbers, and given its $54 million operating loss in the first six months of 2010, it'll likely set a record for the entire year when the results are announced sometime in February or March. Why exactly are the Konstantinu's accumulating such a large position in a retail operation that obviously has many flaws? The potential payoff should a turnaround occur would be enormous.
Keys to Turnaround
Pacific Sun brought in Gary Schoenfeld in June 2009 to turnaround the ailing retailer. Schoenfeld, along with his dad Walter, did the same thing for Vans in the 1990s. Sixteen months in and it's clear this task isn't an easy one. However, these things often take time. Bill McComb, CEO of Liz Claiborne, is into his fourth year of a multi-layered corporate reinvention that still has a ways to go. Schoenfeld's made a bunch of key hires, some of which have worked out while others haven't. In January, the company hired Robert Cameron as its chief marketer and on October 25, less than one year into the job, let him go. Hopefully, Paula Lentini, the Senior VP of Retail hired in April will last beyond the Christmas season.
Schoenfeld has a basic plan that includes reconnecting with heritage brands like Fox, Hurley and Roxy; getting the right talent in place which sometimes takes longer than planned, better merchandising and buying, improving the customer experience, marketing its key brands more effectively and localizing its offerings to meet the needs of customers in different parts of the country. All of these have to come together before the turnaround can take hold. Clearly, it's not making enough progress on these fronts.
Valuation
This is where the investment begins to make sense. I picked rival Zumiez (Nasdaq:ZUMZ) in August 2009 because its stock was trading near historical lows and since then has doubled in price. While Pacific Sun's situation today isn't nearly as rosy as Zumiez in 2009, there is still a compelling valuation argument. For instance, Pacific Sun's market cap is currently 1.5 times its net tangible assets compared to 4.5 times for Zumiez. In terms of sales, Pacific Sun's price-to-sales ratio is 0.39 compared to 1.96 for its more successful competitor. Frankly, with no debt and still generating positive free cash, I see current book value per share of $3.85 as the floor on Pacific Sun's stock price. Therefore, the Konstantiu's are looking at a potential downside of $20 million, which is an acceptable risk in my opinion.
The Bottom Line
While the current situation at Pacific Sun doesn't suggest a near-term improvement in the stock price, it's clear that the Konstantinus believe that in the long term, it's likelier to rise above $6 then fall below $4. It's a risky bet that likely will pay dividends for the up-and-coming value investors. (To read the original article on the Greek portfolio, check out Playing The Greek Portfolio.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
by
Will Ashworth
Will Ashworth lives and works in Toronto, Canada. He's worked in and around the financial services industry for much of his adult life. He loves investing and is passionate about helping others learn how to put their money to work.
Free Annual Reports
