Dueling Fools
Fruit of the Doomed
Bull Argument
By
Rotting Fruit? As the bull Duelist for a beleaguered company like Fruit of the Loom, I have a simple strategy: Steal Paul's thunder and hope lightning doesn't strike twice.
So, let me beat my friend to the sucker punch by pointing out what a mess Fruit has gotten itself into. It just got booted off the S&P 500. It is looking for a new CEO and CFO. It held a press conference two weeks ago to dispel rumors that the company did not have enough liquidity to meet its financial obligations. (It does -- at least through the end of the year.)
Finally, the company is reporting wilted financials due to "production" and "customer service" problems. Customer service? That's as if I were going to set you up on a blind date with a dog and concede that your date doesn't even have a good personality.
Rotten cotton, you say? Nonsense! This elastic band can stretch quite a bit. As the company shuffles to find new leaders and cure its inventory ills, this is an intriguing opportunity to pick up a collection of great brands at an even greater price. A little more than a year ago the stock was fetching 10 times what it is today. Yet the core brands, like Fruit of the Loom and BVD, are not a tenth as significant as they were last summer. Or are they?
This is a company that, despite the recent wave of Wall Street cynicism, is producing 2.2 million garments a week and is actually growing market share in certain areas. The internal issues are critical, I can't deny that, but this is a company with $2 billion in trailing annual sales going for a cool quarter billion.
Next year, even the most pessimistic analyst expects the company to earn $0.45 a share. That's a single-digit earnings multiple. If the company were to return to last year's form, where it earned $1.88 a share, or three years ago where it earned $1.91 a share, we're talking a size 2 here.
This isn't the first time a consumer-brand maker has had to deal with temporary margin-munching adversity. It won't be the last. Paul might argue that the time to reconsider Fruit is after the company rights its wrongs, after the stock quadruples and then some. My contrarian position is clearly one of risk but also one that provides all of the rewards.
Right now the investment community is discounting the ongoing executive search. Fruit is not going to turn to its label for inspiration and come away hiring the apple and grape guy as CEO and CFO, respectively. No way! And the rumors circulating that the pear guy is on the short list are also false.
The time of self-denial is over. We know the emperor has no underwear. Fruit is beyond the stage of introspection. It has identified the culprits. It is set to raise capital by selling non-core assets. Liquidity is here. Profitability is coming.
Where does that leave us? Brandfaith. I know, I made that word up. But living in Miami -- where Pro Player Stadium hosts 81 Florida Marlins baseball games, 10 Miami Dolphins games, and occasional Super Bowl and Monday Night Football games -- I see ripening Fruit.
Pro Player and Fans Gear are Fruit's sports apparel brands. This is high margin turf for Fruit to grow beyond what many might consider commodity undergarments. Then again, it's not as if Fruit's BVD undies or Gitano jeanwear are white bread.
Forbidden Fruit? Hardly. Paul, I dare you to take a bite.
Next: The Bear Argument