Bon-Ton Stores Isn't a Retail Value Trap, It's a Train Wreck

NEW YORK (TheStreet) -- On Jan. 13, in an article on TheStreet I warned investors about retail "value traps" such as The Bon-Ton Stores (BONT), Sears Holdings (SHLD) and J.C. Penney (JCP). Over the past two weeks, Bon-Ton has fallen more than 25%. And it is becoming clear that Bon-Ton is more of a retail train wreck than a value trap.

A value trap is a stock with such appealing valuations that investors buy, anticipating gains when the market more efficiently prices the stock. At least, that's the hope. Value plays are cheaply priced stocks that will then appreciate nicely. Value traps are cheap stocks that will drop even further. And beyond the value trap is the train wreck.

Bon-Ton stock is cheap, but it's not attractive. The price-to-sales ratio is 0.08. Each dollar of sales for Bon-Ton Stores is priced at more than a 90% discount in the stock. As the share price has fallen more than 40% in the last month, that is hardly a profitable investment unless an investor holds a short position.

There is certainly no shortage of those investors with Bon-Ton Stores.

A short position of 5% is considered to be troubling for a business. The short position for Bon-Ton Stores has been ticking up, and is now more than 29%, according to Yahoo Finance. For Sears Holding, the short position is 55.4%. J.C. Penney has a short position of over 56%. That is certainly not the case with all in the retail sector -- Wal-Mart (WMT) has a short position of just 1.5%.

Bon-Ton Stores has been caught up in a "perfect storm" of adverse conditions affecting some retailers.

Compare Bon-Ton to Amazon (AMZN), which had a record holiday season. There is no discounting the toll that Internet shopping takes on the sales of retail stores like Bon-Ton. On a quarterly basis, sales growth is down 2.4% for Bon-Ton. Over the past five years, sales growth has tumbled by 3%. Even more concerning is that comparable store sales are expected to decline by around 3.5 % for 2013, according to guidance just issued by the management.

It is difficult to see how Bon-Ton Stores is not in a retail death spiral.

Six months ago, in July 2013, it was trading at over $21 a share. It fell to around $10 a share in October, than rallied strongly. It closed at $18 a share on Nov. 27, 2013. An analyst report from Telsey Advisory Group raised the target price from $13.50 to $16 a share on Nov. 22, 2013. That, along with the bull market and strong performance by the retail sector for 2013, undoubtedly helped, too.

But, in terms of having to stand on its own merits, Bon-Ton Stores is collapsing.

Earnings-per-share growth is down by 73.1% this year. With the guidance from management that comparable store sales are expected to decline, it is difficult to be bullish about any improvement in the future. That is compounded by the declining sales growth. Even worse, Bon-Ton Stores has a debt-to-equity ratio of 20.3.

The book value of Bon-Ton Stores is $2.39 per share, according to Yahoo Finance. For J.C. Penney, it is $8.69 a share. Sears Holdings has a book value of $17.68.

Bon-Ton Stores is selling at a price-to-book ratio of 4.82. The sector average is 3.82. For Wal-Mart, it is 3.36.  Even though the stock is down nearly 30% for 2013, it still appears to be overvalued based on declining sales, decreasing revenues, the high debt load, and its overpriced assets.

At the time of publication, the author held no positions in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

Jonathan Yates has written for numerous publications including Newsweek and The Washington Post. He is a former general counsel for a publicly traded corporation. Much of his career was spent working on Capitol Hill for Members of Congress in both the House and Senate. He has degrees from Harvard University, Georgetown University Law Center and The Johns Hopkins University.

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