Sunday, August 13, 2006

Blair Corp: The Aftermath of a Buyback
Will This Company be Next to go Private?

Ticker: BL
Shares Out: 3.94 million
Market Cap: $94.4 million
Ent Value: $67.2 million
Price: $24.2
Avg Volume: 27,500
P/E: 5.4
Dvd Yield: 5%

In our last report on this tiny Warren PA based catalog and internet based clothing retailer, Blair had recently sold its credit portfolio, and used the proceeds to repurchase more than half of its outstanding shares. This former net-net company bought back 4.4 million shares, at $42 per share. At the time, we viewed this as perhaps the first step in taking the company private.

A Rough Stretch
Since then, the road has been rocky for Blair. Hindsight may be 20/20, but the company is currently valued at about half of what it was when Blair completed the tender offer. This raises the question as to whether the company did itself and its shareholders a disservice by repurchasing a large block of shares at an $18.00 premium to the current price. Or, is the market- small as it may be for a company like Blair- strongly undervaluing Blair?

Recent Results
The recent trouble started when the company reported poor first quarter results, losing $4.5 million (vs income of $650,000) on sales of 104.2 million (down from $107.6 million). Blair blamed poor advertising efficiency and increased SG&A for the lackluster results. In response, the shares plumetted from about $46.50 into the 20's in the ensuing months.

The recently reported second quarter was not much better-sales fell 5 percent, and net income of $233,000 was down sharply from last year's $6.1 million. The company blamed the sales shortfall on higher unit volume, offset by lower selling prices, and higher costs on increasing postage and paper costs, exacerbated by greater catalog circulation. One concern here is that the company has been attempting to do more internet business, where paper/postage are less of a factor. In the second quarter, Blair did generate $27 million in sales from its e-commerce site, up 18 percent from the same quarter last year, but still less than 25% of sales.

Attractive Valuation? Dividend Cut?
Operating results have been disappointing. From an enterprise value perspective, however, (EV=$67 million) Blair is interesting. This former net/net currently trades at just 1.38 times net current asset value. The company also pays a $.30 quarterly dividend, yielding 5%, although we don't believe this is sustainable if results do not improve soon. The company does have $27 million in cash, but it would be difficult to imagine Blair exceeding a 100% payout ratio for long.

Will Blair Go Private
We certainly believed they were headed that way following the tender offer. Although we believe the possibility does exist that the company will be taken private, we don't believe it will be through the delisting/pink sheet/SarbOx avoiding route we often write about here at Cheap Stocks. As of 12/31/05, Blair had 1929 shareholders of record, far above the magic 300 level required to delist. Yes, it could be done, but would perhaps require a very creative reverse stock split and/or tender offer.

We've followed Blair for years, but have never owned shares. At least for now, its back on our radar.

*The author does not have a position in this stock. This is neither a recommendation to buy or sell this security. All information provided believed to be reliable and presented for information purposes only.

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