Stock Mart: Elder-Beerman Stores

When people think about investing in department stores, they usually think of famous names like Federated (FD) and May (MAY).

But as any smart shopper knows, sometimes you can find a nice bargain if you look beyond the well-known brands.

That appears to be the case with the Elder-Beerman Stores (EBSC). Investors and analysts say that the Dayton, Ohio-based regional department store chain looks cheap and has a lot more going for it than one might see at first glance. The company operates 60 department stores, primarily in Ohio, West Virginia, Indiana and Michigan, and runs 56 shoe stores and two furniture superstores.

"Elder-Beerman has been off the radar screen for three or four years. It's just popped back in and nobody's ever heard of it," says shareholder Jeff Hooke, author of the book Security Analysis on Wall Street and managing director of the investment banking firm Hooke Associates.

In examining Elder-Beerman, Hooke favors the valuation yardstick of enterprise value to EBITDA. (Enterprise value is market capitalization plus debt, while EBITDA is earnings before interest, taxes, depreciation and amortization.) That's also the approach taken by Jeff Stein, an analyst at Cleveland-based McDonald Investments.

By Stein's calculation, Elder-Beerman's stock price puts its enterprise-to-EBITDA ratio at 4.3 times for the fiscal year that ended Jan. 31. Comparable regional retailers like Gottschalks (GOT) and Jacobson Stores (JCBS), Stein says, are trading at an average enterprise-to-EBITDA ratio of 7.7 times.

And Elder-Beerman's enterprise-to-EBITDA ratio for the current fiscal year is about half the level at which other department stores that have been bought out, though Stein isn't pitching the company as a takeover play. Stein, whose firm led a secondary offering for Elder-Beerman last July, has a buy on the company, McDonald's second-highest rating.

So why is Elder-Beerman marked down? Probably because the goods looked a little damaged to investors.

The company, which emerged from two years of bankruptcy protection in December 1997, had trouble meeting analysts' expectations out of the gate. Its stock closed its first day of post-bankruptcy trading in February 1998 at 16 1/2 and traded as high as 29 3/8, but it's been pretty much downhill since. In October, the company fell 33% in one day, closing at 11 3/8, after saying it would fall short of analysts' expectations for the fiscal third quarter. The market ignored the company's assertions that it was still comfortable with full-year estimates of $1.30 to $1.35 per share.

Investors were on the right track, because Elder-Beerman then failed to make the annual numbers. Excluding one-time adjustments, and including normalized income-tax expense, Elder-Beerman earned 95 cents a share for the year. Comparable department-store sales increased 4.1% over the previous year but decreased 0.3% in the fourth quarter.

"They didn't have enough good information in the field," says a large shareholder in the stock, who asked to remain anonymous. "The Street has been disappointed."

But that's not to say that this investor and others don't see promise in the retailer, starting with the management team. Chairman Frederick Mershad was formerly CEO of the Proffitt's regional department stores, now part of Saks (SKS). President John Muskovich is a Federated veteran, as is James Zamberlan, executive vice president. The company didn't make executives available for an interview.

In 1998, the company was occupied with a major acquisition: buying the 21-store West Virginia-based Stone & Thomas chain, selling or closing 10 of those stores and converting the rest to Elder-Beerman stores. The company is making progress with the new stores, Stein says, improving gross margins and finding the appropriate merchandise mix.

This year, the company is taking other strategic initiatives, primarily an overhaul of its traditional buying structure. Previously, buyers selected, priced and allocated merchandise. Under the new strategy, store-by-store inventory management is being handed off to other personnel.

"The company has made a tremendous amount of headway since emerging from bankruptcy last year," says Jeff Stinson, an analyst with Cleveland-based Midwest Research, which hasn't done underwriting for Elder-Beerman.

The question for investors is When will management's improvements show up in the stock price?

Hooke says the company is ripe for buyout, given its low insider holding. Stinson agrees that one of the larger department stores -- May, Federated or Saks -- could be interested in the company as they look to grow in smaller markets. "Somebody eventually is going to find this real estate attractive," he says. But he doesn't see that happening in the next 12 months. Stinson downgraded the stock in January to market perform, the firm's second-highest rating, from a buy.

What could push the stock up, Stein says, is the company's ability to reach the $1-per-share consensus estimate this fiscal year. "If they make a buck, I think the stock could trade up to the 10 to 12 level," Stein says. "It's a function of making believers out of investors."

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