Bon-Ton Investors May Be Starry-Eyed

Investors in Bon-Ton Stores (BONT - commentary - Trade Now) have certainly seen some good times recently. The stock, which had been administered last rites in the despondent days of March, has bolted from a low of $1.18 to a recent high of $14.00. The euphoria has stemmed from improving sales trends and the promise of cash flow robust enough to pay off some debt.

The concept of lower debt is a tantalizing one for investors. Back in March 2006, after Bon-Ton acquired the Carson chain of stores from Saks for cash, its debt ballooned to $1.2 billion. Debt stood at $1.155 billion in the most recent quarter. The stock, which was $16 when the deal was announced, ran to a high of $55 on the hopes of expense rationalization and geographic diversification of sales. Bud Bergren, who is still Bon-Ton's president and CEO, said at the time that the acquisition would "enhance shareholder value by providing an expanded and diversified geographic presence and economies of scale that will drive greater profitability."

Huge losses have followed, due to lower sales and outsized interest payments. These losses have caused book value of the shares to shrivel to $3.27 per share in the most recent October quarter, from a level of $21.00 per share in January 2007.

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After the closing of the Carson acquisition, operating income per store proceeded to fall year over year for the next 11 quarters. Only in April of this year did profitability begin to improve because of dramatic cuts in selling, general and administrative expenses. SGA cost per store has declined 12% since its peak in April 2008, to roughly $3.3 million annually per store. On a square-foot basis, Bon-Ton spends only about $47 per square foot, compared with $52.48 spent by a lean operator like Kohl's (KSS - commentary - Trade Now).

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At the time of publication, McDonough's fund was short BONT.

Linda McDonough has been a research analyst with Manchester Management, a long/short hedge fund in Boston, for 18 years. She has covered a multitude of sectors, with a current emphasis on consumer health care and technology.