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Friday, August 28, 1998
Samsonite Corp.
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Phone: 305-532-2426
Website: http://www.samsonite.com
Price (8/27/98): $7
HOW DID IT FIND TROUBLE?
The gorilla takes the Samsonite <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SAMC)") else Response.Write("(Nasdaq: SAMC)") end if %> suitcase and pounds on it, slams it against the cage bars, and tosses it around. Like the familiar ad, Samsonite investors have been rattled. The losses. The inefficiencies. The debt-heavy tender offer. Oh, the pounding these poor travelers have been subjected to.
It has been some heavy baggage to lug around, but it wasn't always this way. Two years ago shares of Samsonite, like those teeny-weeny wheels on some of their dual-handle models, began to roll. Richard Nicolisi had taken the helm. Nicolisi had been Al "Chainsaw" Dunlap's understudy at Scott Paper, and the tutelage under the famous cost-cutter served him well at first. Eventually the company provided investors with something that had been misplaced for years -- profits. With the turnaround of a company that had been mired in bankruptcy court just a few years earlier, shareholders packed up huge stock gains.
But like the recent problems at Chainsaw Al's last stop, Sunbeam <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SOC)") else Response.Write("(NYSE: SOC)") end if %>, showed, slashing overhead is often a temporary fix. Samsonite began to stumble when the company closed out fiscal 1998 with a $0.22 a share earnings gain for the January quarter. The estimates had called for $0.60 a share. That weakness carried over to back-to-back losses to kick off fiscal 1999.
The once high-flying shares were grounded. Sometimes, the gorilla is just too strong. Sometimes, there is no escaping the cage.
BUSINESS DESCRIPTION
Beyond the namesake suitcases, Samsonite's brands include American Tourister and Lark. The Florida-based company is the world's largest manufacturer and distributor of luggage.
Samsonite was formed in July 1995 when it merged with its parent company, Astrum International. Just two years before, Astrum had emerged from bankruptcy.
FINANCIAL FACTS
Income Statement
12-month sales: $724 million
12-month income: $43.7 million*
12-month EPS: $2.06*
Profit Margin: 6%
Market Cap: $142.8 million
(*From continuing operations, before non-recurring items)
Balance Sheet
Cash: $6.9 million
Current Assets: $354.2 million
Current Liabilities: $138 million
Long-term Debt: $203.6 million
Ratios
Price-to-earnings: 3.4
Price-to-sales: 0.2
HOW COULD YOU HAVE SEEN IT COMING?
In January, Samsonite contracted with Goldman Sachs to drum up a plan to increase shareholder value. In just three months the shares had gone from $50 to $36, and this was well before the disappointing January quarter was completed. So, Goldman Sachs was hired and takeover rumors began to swirl.
But rumors, like circular conveyor belts, eventually send you back where you started -- which in Samsonite's case, was alone. After mulling over a $12.50 one-time dividend or simply selling just half the company, the luggage maker decided to be its own suitor. A May self-tender offer announced as the stock dipped below $30 per share sought to buy back half of the shares outstanding at $40 a pop. The 10.5 million stock purchase fooled no one. Only Samsonite was willing to pay such a stiff premium for Samsonite. So the shares were stagnant, as everybody knew full well that once half the shares were bought at $40, the balance would dip immediately into the teens.
That is exactly what happened, and those who stuck around were treated to an ugly April and an even uglier July quarter. What could have tipped one off here? Just a few days into January, when Samsonite summoned Goldman Sachs, history was not on its side. Often when a company turns to an investment banker to cure its ills, the malady is worse than is publicly known.
At the time, Samsonite was getting ready to wrap up a January quarter in which earnings were to come in at a third of what had been projected. The Asian flu was evident, but so was a domestic bug that was eating away at operating efficiencies in the company's Denver plant. Pricing strategies were also backfiring. Although improving European sales were a bright spot, the stronger dollar was eating away at the profits. All this was brewing, but was as yet unknown. However, those who looked at the call to Goldman Sachs as an early S.0.S. were fortunate enough to pack up their Samsonite baggage and leave the sinking ship while the lifeboats were still around.
WHERE TO FROM HERE?
The most recent chapter in Samsonite's business life is a comedy of errors. As the company began to upgrade its computers over the summer, fulfillment went haywire. The system conversion virtually halted shipments for the first three weeks of July. The practical shutdown also impacted simple yet necessary corporate functions like invoicing. So, Samsonite wasn't selling new wares and wasn't able to keep tabs on old debts.
Matters have only gotten marginally better since the new system finally got operational and shipments resumed at less than full capacity. A company that took on debt in the $420 million self-tender, leveraging its financials, can see bad results compounded into abysmal reports -- and if not corrected, bankruptcy court may have a familiar visitor.
The investors were deserted souls here since it wasn't until August when the company announced the July malaise. One might imagine that every supplier and customer of Samsonite knew something was amiss. Waiting until the quarter was officially over to pre-announce an $11 to $13 million earnings shortfall before taxes and bloated interest payments was not the fairest of acts to outsiders.
Despite all this, the generally neutral analysts still expect the company to turn things back into the black later in the year. The introduction of the Silhouette 6 in October is being touted, but it is hard to believe that one new product is going to account for more than just a thin slice of a diverse product line's pie.
While fiscally skeptical, I do have to close with something that I don't think anyone has really given Samsonite credit for -- it has an outstanding website. The online store is an interesting tourist-to-be one-stop shopping destination. From Rockport Sandals to Milton Bradley travel games, it is more than just durable gorilla toys. Given the strong Samsonite name and its significance in travel, I can easily see the company incorporating virtual travel guides, area weather -- just about anything to make it a popular travel content site that can feed visitors to its well-stocked store.
Ironic, I know, given the company's computer woes of July, but this is a high-tech angle to Samsonite worth considering -- as long as the sky high debt service doesn't give you air sickness along the way.
-Rick Aristotle Munarriz
([email protected])
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