Thorner's Turnaround Talents Have Bradlees Blooming

The ex-Ames chief executive isn't a Wall Street favorite, but he's righted a pair of foundering discounters.
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Peter Thorner, the president and chief executive of

Bradlees

(BRAD)

, is a realist.

The mastermind behind the turnarounds of regional discount chains

Ames Department Stores

(AMES)

and Bradlees says he often sees the glass as half-empty, rather than half-full. The problem is that Wall Street has often seen Thorner's cup as completely drained.

But Wall Street was wrong about Ames and it is turning out to be wrong about Bradlees, too.

Since emerging from Chapter 11 in February, Bradlees' performance has far exceeded expectations. Traffic has been so heavy at some of the company's 102 stores that the Braintree, Mass.-based retailer has rushed to add extra cash registers to handle the volume.

Taking Ames
Ames, Bradlees Shares on the Rise

Source: BigCharts

"We have stores where, on a Saturday afternoon, you can't get into the parking lot," Thorner says. Bradlees had originally planned to close its store in Yonkers, N.Y., because of sluggish performance. Now that business there has picked up dramatically, the company has decided to operate the store for the remainder the 34-year lease, Thorner says.

Indeed, sales at Bradlees stores open at least a year have jumped 12.6% in the year to date. That compares with a sales-weighted increase of 8.2% for discount stores tracked by

Salomon Smith Barney

over the same period. Thursday morning Bradlees, along with other retailers, will report June sales figures. One money manager who owns Bradlees shares and who asked not to be named expects same-store sales to "beat their year-to-date trend by a bunch."

Thorner makes it easy for investors to track the company's progress by detailing internal sales and earnings plans in publicly available documents filed with the

Securities and Exchange Commission

. The strategy sets Thorner apart from many other executives, who tend to keep projections close to the vest to provide leeway should business sour.

"Originally, we wanted to give creditors during the Chapter 11 process a picture of how the company was doing," says Fred McGrail, a Bradlees spokesman. "Coming out of Chapter 11, we've continued to provide a benchmark. We want to be upfront. And we didn't have a year of operating performance behind us" to give investors comfort.

For its first quarter ended May 1, Bradlees beat its plan in almost every measure. Same-store sales for the period rose 12.6%, far ahead of the 2.4% forecast. The loss before interest, taxes, depreciation and amortization was $9.3 million, far narrower than the expected loss of $14 million. And sales totaled $325 million, 9.7% ahead of plan.

Bradlees' annual forecast calls for $40 million in EBITDA on $1.4 billion in sales. The money manager says that at its current rate, Bradlees will exceed its annual forecast handily. He figures the company will see cash flow of $60 million on sales of $1.6 billion.

Which is all the more reason, he says, that Bradlees is still ridiculously undervalued even given its stellar performance (shares have rocketed around 500% from their lows in March). Wednesday the stock was up 1, or 7.1%, at 15.

Most other discount chains trade around eight times EBITDA. Yet Bradlees is trading at only around 3.5 times cash flow. Given a multiple comparable to its peers', the stock would change hands in the low 30s.

And there is good reason to believe that the momentum at Bradlees is just getting started. Thorner says he can double the chain's size without incurring notable expenses, thanks to cost-cutting measures completed while the company was in bankruptcy proceedings.

Bradlees, with its emphasis on fashion, has lucked out on some of the summer's hottest trends. It's stores have stocked up on the popular Capri pants and are featuring loads of red, a color that's much in vogue this season, as well as fashion denim.

Bradlees also is getting a boost from the liquidation of

Caldor

, its nearest competitor, earlier this year and is aggressively trying to capture those customers. Even though the competition will thicken as chains like

Kohl's

(KSS) - Get Report

and the

Target

division of

Dayton Hudson

(DH)

move into vacated Caldor space, most industry followers concede that Bradlees has a shot at differentiating itself from those players much the way Ames did, by appealing to a lower-income customer. In the past two years, Ames stock has shot up nearly 400%. Although much of the recent gain was achieved under Joseph Ettore, Ames' current president and chief executive, Thorner set the stage.

For the doubters still in attendance, one analyst who tracks retailers but who doesn't follow Bradlees, and therefore declined to be named, had these words of wisdom: "Who would've foretold Ames success?"

Peter Thorner, of course.