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Thursday, January 8, 1998
Big Dog Holdings, Inc.
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Phone: 805-963-8727
Website: http://www.bigdogs.com
Price (1/7/98): $5 3/16
HOW DID IT FIND TROUBLE?
This specialty retailer has what now looks like a pretty ironic slogan: "If You Can't Run with the Big Dogs, Stay on the Porch." After wagging its tail in a September 26, 1997 public offering at $14 a share and then basically running in place for a month, this puppy crawled back onto the porch, where it's now looking pretty sheepish.
Big Dog has become a howler based on nothing but good news. On October 30, it announced third quarter earnings of $0.15 per share, up 114% and in line with expectations. Same-store sales rose 5.2%. That wasn't up to the 9.6% rate for the first half of the year, but it wasn't bad. The IPO also raised enough money to cancel all the company's debt and pay for continued rapid expansion.
A few days after the earnings, the retailer's underwriters, Hambrecht & Quist and Needham & Co., reiterated their "buy" recommendations. Within hours, the stock fell to $11 a share in what looked like a classic case of underwriters withdrawing their price support for a stock, as I discussed in November Fool on the Hill. A week later Big Dog was in the $9 range.
Add a little tax-loss selling and general uneasiness about a poor holiday season for retailers, and before an investor could say ruff ruff, this old dog had dropped more than a few bones to a low of $5.
BUSINESS DESCRIPTION
Big Dog markets a collection of moderately priced consumer products, mostly basic activewear, casual sportswear, and accessories. The company says its clothes appeal to men, women, and children "when they are in the 'Big Dog state of mind.'" The products feature a wholesome and fun-loving "Big Dog" character as part of the logo and slogans such as "Unless You're the Lead Dog, the Scenery Never Changes."
As of October, the company's products were sold through 144 Big Dog retail stores, many located in outlet malls near tourist areas. The company also markets its products through catalogs and some retailers such as Dillard's and Nordstrom. The company planned to have 151 stores open by the end of 1997, with another 35 to be added in 1998.
Co-founder and Chair Fred Kayne owns a controlling stake in the company.
FINANCIAL FACTS
Income Statement
12-month sales: $80 million
12-month income: $1.2 million
12-month EPS: $0.12
Profit Margin: 1.5%
Market Cap: $68.2 million*
(*Based on 13.14 million shares outstanding as of Nov. 10, 1997)
Balance Sheet*
Cash: $37.3 million
Current Assets: $61 million
Current Liabilities: $13.1 million
Long-term Debt: $15.5 million
(*As of September 30, before the company used $21.5 million to pay off all its creditors.)
Ratios
Price-to-earnings: 43.2
Price-to-sales: 0.85
HOW COULD YOU HAVE SEEN IT COMING?
Even after its terrific earnings report, Big Dog's valuation might have given one pause -- 117 times trailing earnings is doggone expensive. Yet, the analysts' estimates called for the company to earn $0.62 a share in 1998, putting the stock at a more reasonable 23 times forward earnings.
Some short-sellers around Fooldom, though, noticed that the stock was consistently trading at its IPO offering price, exactly where it had begun and ended its first day as a public company. This pattern often means that there's weak demand for the stock and that the underwriters are keeping it afloat, waiting for some good news to bring in new buyers who will sustain the price once the underwriters back off. Sometimes the good news comes but often it doesn't.
The third quarter report did provide good news, but not enough to get any new investors excited. When it failed to trigger a rally, an investor might have wondered if this stock was ready to roll over and play dead. The collapse after the underwriters' public "buy" recommendations signaled that the dog days had begun. What's interesting is that even after it started howling, the stock still had another 50% to fall before reaching its recent low.
WHERE TO FROM HERE?
Can an old dog learn new tricks? A business based on enticing customers to buy T-shirts and boxer shorts that put them in the "Big Dog state of mind" doesn't really sound like something the Gap <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GPS)") else Response.Write("(NYSE: GPS)") end if %> needs to worry about. Still, Big Dog has managed to expand its company stores from 5 in 1993 to around 150 today. Between 1993 and 1996, the company also ramped up sales from $11.4 million to $68.7 million, a compound annual growth rate of 82%.
The relative pace of new store openings will slow, but the higher same-store sales figures indicate that this retailer is pulling in some new customers. With interest payments all but ditched, the company's net income should improve considerably in the year ahead. Big Dog also stands to benefit from better operating leverage as its infrastructure costs are spread out over a growing revenue base.
One could argue that the underwriters' consensus EPS estimates of $0.29 for FY97 and $0.62 for FY98 should be ignored considering that they had a $4 million incentive to project strong results for the company. On the other hand, the stock now trades at less than one times sales, and the company appears to be in strong financial shape with ample room for improving profitability. If Big Dog can jump through the hoops analysts have set out, the stock will surely end up looking cheap at $6 a share, or just 9.7 times forward estimates.
What's clear is that Big Dog is now a very out-of-favor stock that's yet to issue any actual bad news. Since it pulled in 38% of sales and all of its FY96 profits in the fourth quarter, the next earnings report should offer some insight into whether the stock is ready to kick off the flies, bound off that old porch, and run with its namesake.
-- Louis Corrigan
([email protected])
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