Stock Mart: Bradlees

Take all the dresses, towels and knick-knacks that Bradlees (BRAD) sells out of its 102 stores, and what have you got? A bargain, according to two bullish money managers.

The stock closed Friday at 8 1/4, up 3/16. But the company's real estate alone is worth 12 a share, the managers say.

And thanks to the recent liquidation of its closest competitor, Caldor, Bradlees -- which itself emerged from Chapter 11 proceedings in February -- can gain share in the competitive Northeast, they say.

"I always thought Bradlees was a good concept with a good niche," says Bill Corneliuson, president of the money manager BC Holdings. "When Caldor went out of business, that's when it started getting interesting to me." Corneliuson bought Bradlees' shares at 3 1/2 in mid-March.

Ever since Bradlees distributed shares to the public in February, it has received scant attention from the Street. It's not as if Bradlees is a small company -- it had $1.4 billion in revenue in its fiscal year ended Jan. 30. Still, three months later, Bradlees has no analyst coverage.

"That's what we like about it," says Lenny Schuster, a hedge fund manager with Gemina Capital. "It's a hidden gem." Schuster's firm owns Bradlees shares.

While it doesn't exactly have a proven track record, Bradlees does have an experienced manager at the helm. CEO Peter Thorner was the architect of the turnaround of another Northeastern retailer, Ames (AMES), in the early 1990s. Shares of Ames, after languishing in the single digits for years, are now trading at about 34.

When Thorner took over at Bradlees in December 1996, he faced steep losses ($400 million in 1995 and 1996 combined), a disenfranchised customer base and negative $70 million in cash flow for fiscal 1995. Cash flow is earnings before interest, taxes, depreciation and amortization, commonly called EBITDA.

"Our margins went to hell in a handbasket," Thorner said in an interview Thursday.

Thorner says he discovered what the Bradlees customer wanted using the same independent marketing firm he used at Ames. The first thing Bradlees changed was product mix. While still a discount store, Bradlees now sells a lot more housewares (sheets, towels, and so on) than it did. Each store is now broken into fixed departments, with 53% of each selling soft lines, such as housewares and clothing, and 45% offering hard lines, such as lawn and garden equipment and consumer electronics.

Last year, the company saw these changes make a positive impact on its bottom line. Unusually warm weather through the spring and summer pushed customers into stores such as Bradlees, allowing the retailer to post its first same-store sales increase in years, according to Thorner.

The Braintree, Mass.-based retailer reported net income for fiscal 1999 of $286 million compared with a net loss of $23 million the prior year. Cash flow rose to $32.4 million compared to $25.6 million the year earlier

All this positive news had Thorner projecting that Bradlees' same-store sales would rise 5% this fiscal year. And then came the news that Caldor was liquidating its 125 stores.

"I had a gift from God when Caldor said it was liquidating," says Thorner, who has acquired two Caldor leases. "They were our most formidable competitor."

But instead of buying more Caldor leases, Thorner plans on advertising in "Caldor ZIP codes" to pick up its former competitor's market share. Two competitors did pick up Caldor outlets. Kohl's (KSS) paid $135 million for 35 of Caldor stores, and Wal-Mart (WMT) paid $72 million for 12 stores.

While giving Bradlees more breathing room, Caldor's liquidation also provided a guide to measure the value of Bradlees' stores. Schuster at Gemina Capital says if each Caldor store -- which are similar in size to a Bradlees store -- is worth $3 million-plus, then Bradlees' 102 stores are conservatively worth $300 million, which makes the company look cheap. "Bradlees' market cap is only $80 million -- you do the math," says Schuster, whose firm owns more than 5% of Bradlees shares. Bradlees also has a price-to-sales ratio of 0.5. A price-to-sales ratio of less than one connotes value.

This, of course, could be relevant if one of these bigger competitors -- which also include Target, a division of Dayton-Hudson (DH) -- decides to acquire Bradlees to accelerate its move into the Northeast corridor. But Bradlees is intent on differentiating its product mix and brand.

"Frankly, we feel Target and Kohl's appeal to a higher demographic than us," says Thorner.

If Bradlees can show modest same-store sales gains and continue to rebuild its image, says BC Holdings' Corneliuson, cash-flow levels should continue to grow this year. "I believe that by either acquiring Caldor stores or by acquiring Caldor customers, Bradlees can improve its cash flow," says Corneliuson, who predicts Bradlees' cash flow can reach $50 million this fiscal year. "I think its stock can hit 20 by the end of the year."

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