Tuesday, January 06, 2009

Hot Foot

Footstar (FTAR.OB), a shoe seller operating in leased space in Kmart and Rite Aid is liquidating. That suggests opportunity for venturesome investors.

The company appears to have tangible equity of $82 million ($3.84 per share) and a liquidation value of about $96 million ($4.50 per share). This compares to the current stock price of $3.40. If the liquidation figure proves accurate, investors have an excellent opportunity of seeing a real return of about 30% in less than a year.

Footstar operates footwear departments in almost 1,400 Kmarts (SHLD) and over 800 Rite Aid (RAD) stores. In March 2004, due to poor acquisitions, accounting problems and liquidity issues, Footstar entered Chapter 11 bankruptcy. In February 2006, the company emerged and paid creditors in full. While in bankruptcy in 2005, its contract with Kmart was amended. Originally the contract was to expire on December 31, 2012. As a result of the Chaper 11 reorganization, the contract expired December 31, 2008.

Liquidation

Subsequent to the recent expiration of the contract, Kmart will purchase the inventory related to its stores, excluding unsalable or damaged inventory for book value. Seasonal (four months past season) inventory will be purchased at 40% of cost. Footstar has written down seasonal inventory by $2.4 million.

The remaining asset is Footstar’s headquarters in Mahwah, NJ. The building is listed for $19.5 million.

Footstar eliminated three executive positions and notified 218 employees of termination. The severance cost related to the employees is $8.5 million plus $2 million in benefit costs. The company has accounted for $3.6 million of the total. But $6.9 million remains to be expensed.

Footstar’s second half 08 operating earnings are critical. Income taxes are virtually zero due to deferred tax assets. Thus, operating earnings are the best measure of performance. Operating income was $28.4 million for the first half of 2008. This figure includes a non-recurring gain of $22.3 million for reduced severance after Kmart agreed to hire all store and district managers.

Netting out all items leads to estimated second-half operating earnings of $12.1 million compared with $21.5 million for the first six months of last year. Second-half factors effecting earnings include lower operating expenses due to reduced headcount and the weak retail environment. In the first half, Kmart recorded same-store sales declines of 6% compared with Footstar’s decline of 10.6%.

Sears stated it anticipates a modest decline in same store sales for the second half. Operating earnings declined 40% in the first half. Operating earnings were $32 million in the 2nd half of 07. Estimates for second-half 2008 operating earnings are in the range of $19 million-$25 million.

Risks

The biggest risk is a slow liquidation. Footstar will file a plan of liquidation in early 09. However, the inability to sell the headquarters building might delay the final payout.

2 Comments:

Blogger Torrance Stephens - All-Mi-T said...

dang - the economy - all i can write about
have a blessed 2009 folk

9:36 AM  
Anonymous Anonymous said...

Hot foot it out of here!

2:43 PM  

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