Company Review – Bonton Stores

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.

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