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Tuesday, September 15, 1998
Navarre Co.
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Phone: 612-535-8333
Website: http://www.navarre.com
Price (9/14/98): $3 1/4
HOW DID IT FIND TROUBLE?
Welcome to Navarre-land. It's the second falling star to the right, clear on through to mourning. Like Peter Pan, Navarre knows how to fly. It soared in May 1996, and went airborne again in April and July of this year. Investors have probably gotten used to these flights of fancy, which, like pixie dust, have faded all too soon.
Each time the rise has been tied not to the company's dry, yet steady media distributorship, but rather to its ever-growing presence on the Internet. Offline, Navarre plugs away at the low-margin business of stocking the CD shelves at your local Best Buy <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BBY)") else Response.Write("(NYSE: BBY)") end if %> or one of the other 50,000 outlets it services.
Online, the company offers NetRadio, providing all the glittery Internet audio content that 150 proprietary channels can offer. Accepting the limitations of the hissy quality of Real Audio, you pick a genre and are treated to commercial-free tunes. I plugged into New Wave and was immediately whisked back to the 1980s. New Order was followed by vintage Depeche Mode that took us to Romeo Void's solitary hit, "Never Say Never."
Or was that "Never Say Navarre"? The most recent fall from grace came just last month when the stock soared on news that Barnes & Noble <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BKS)") else Response.Write("(NYSE: BKS)") end if %> would be utilizing the company's software distributorship service at its online book site. In theory, the news should have had no effect on the company since Navarre was already a distributor to the offline locations. But, just like the aerial stint back in April -- with no news that time, just more Internet stock frenzy coattails -- the short-term flight was quick and turbulent.
But last month the shares were hooked even more wickedly than before because it came at a time when a huge private placement's lockout period had ended. Way too many sellers, and like Depeche Mode sings... "Everything counts in large amounts."
FINANCIAL FACTS
Minneapolis-based Navarre is a wholesale distributor of prerecorded music and commercial software. The company's accounts include CompUSA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CPU)") else Response.Write("(NYSE: CPU)") end if %>, Barnes & Noble, and Viacom's (ASE: VIA) Blockbuster Music.
Navarre also owns NetRadio, a popular Internet site featuring different music and infotainment channels. In June, the company launched cdpoint.com and softwarepoint.com to sell music and software titles online.
Income Statement
12-month sales: $210.1 million
12-month income: $0.12 million
12-month EPS: ($0.04)*
Profit Margin: N/A
Market Cap: $39.7 million
(* Includes payment of dividends on Class A shares.)
Balance Sheet
Cash: $0.03 million
Current Assets: $94.1 million
Current Liabilities: $74.8million
Long-term Debt: $0.2 million
Ratios
Price-to-earnings: N/A
Price-to-sales: 0.19
HOW COULD YOU HAVE SEEN IT COMING?
Some companies Navarre learn. In May, the company was running low on funds so it issued a $20 million private placement. The fact that it was dilutive would be an understatement. The deal consisted of 7.6 million shares issued at $2 5/8 and 7.6 million warrants exercisable at $3 1/2.
The offering might have seemed fathomable earlier in the year when the stock was trading barely above two bucks a share. However, since the shares had hit $12 3/4 the month before, Navarre's timing couldn't have been worse. The logical solution, which was to produce working capital by spinning off the pure Internet glitz of NetRadio, did not occur to the company until late July. Too little, too late. By then the damage was done and the dilution had flooded the stock.
The placement buyers, which included more than a dozen individual investors, pension funds, and even American Gramophone (a long-time supplier to Navarre), simply had one restriction before cashing in on their bounty -- they had to wait until the end of June to begin selling off their respective stakes.
So, just nine days into July, when news that Barnes & Noble's website would begin doing what the brick and mortar stores were already doing, the run-up into the pre-teens was destined to falter.
With the offering shares having appreciated many times over, it was clear that the selling would kill off any rally. The placement shares and warrants represented twice as many as all of the shares outstanding at the time. Any fundamental improvements -- and there would be plenty for Navarre -- would be greeted like a salmon trying to swim upstream as the deluge rained down.
WHERE TO FROM HERE?
Over time, history may forgive and forget. With every passing day it seems that there will be less of the private placement players fueling that pent-up selling demand. That's a good thing because beyond the ill-advised offering there is little not to like in Navarre.
The company turned a profit last quarter, and this despite the startup costs in setting up CDPoint and SoftwarePoint, which were launched two weeks apart in the month of June. Navarre calls the strategy "c-commerce," the "c" standing for content-enabled. Drawing 20 million page hits a month and 3 million audio listens, the company has the perfect magnet to draw music fans to consider buying the selections they are hearing directly from Navarre.
On July 27, the company announced that it would be spinning off NetRadio, and coming on the heels of the successful debut of Broadcast.com <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BCST)") else Response.Write("(Nasdaq: BCST)") end if %>, demand should be healthy for the popular website. It's a shame that the private placement has sandbagged the stock's performance. Who knows how high the stock would be trading today if the 7.6 million shares and 7.6 million warrants at rock bottom conversion prices had never come about -- certainly higher than the $20 million in proceeds generated from the deal.
In the meantime, new deals are creating rallies that may eventually wear out the selling supply. Last month the company announced that it would be opening turnkey DVD departments at all 162 CompUSA stores. NetRadio's presence continues to grow as now it is being bundled on the latest Packard Bell and NEC personal computers. And you can't discount that if Amazon.com <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMZN)") else Response.Write("(Nasdaq: AMZN)") end if %> had a great run after announcing it would expand beyond selling books, then the company helping barnesandnoble.com do the same thing also deserves some sustained Wall Street attention.
If and when the NetRadio division becomes a publicly traded entity, the valuation may work wonders to bring back the strength into the shares of Navarre -- except this time it may be packing a jet engine instead of pixie dust to remain airborne.
-Rick Aristotle Munarriz
([email protected])
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