Monday, September 11, 2017

Perfumania: Prepack Bankruptcy, Small Equity Consideration

Here is another small special situation -- Perfumania (PERF) is the largest specialty retailer and distributor of fragrances and related beauty products in the United States, they've suffered from the Amazon effect and resulting decrease in mall traffic like many other specialty retailers.  On August 26, Perfumania filed for chapter 11 bankruptcy protection, primarily as a way to bring their mall landlords to the table as they explicitly call out that significant landlords would only negotiate with them if the company was in bankruptcy.  All of their other creditors will be unimpaired including the controlling family, the Nussdorfs, who are both their largest creditor and equity shareholder.

The Nussdorf family owns just under 50% of the equity, they're proposing to pair up with another large investor, the Garcia family, to recapitalize the company and inject $14.2MM into Perfumania.  Their plan is to take the company private and then shutter much of the 226 retail store footprint, instead focusing on the distribution side of the business.  In order to speed things along and ensure a quick stay in bankruptcy, they're throwing a bone to the minority shareholders by giving "the opportunity to receive consideration of $2.00 per share in exchange for completing a shareholder release form."  The company's financial advisers call it a "gift" and that the company has no value on a going concern basis.

There are some NOLs here to protect, and the Nussdorf family has loaned the company $85MM, their interests are somewhat aligned to see this company restructured and perform well moving forward.  But time is critical for any retail turnaround story, hence the need to rid themselves of any delay from angry shareholders.  The opt-in date for the shareholder release form is 10/6/2017, or less than a month away, and shares currently trade for just over $1.80 per share representing a fairly decent short term return opportunity.  There's risk here, if the deal gets pulled or the plan doesn't get approved by the court (both seem unlikely?), we already know the equity is worthless, size appropriately.

Disclosure Statement: https://www.sec.gov/Archives/edgar/data/880460/000088046017000031/exhibit991disclosurestatem.htm

Disclosure: I own shares of PERF

15 comments:

  1. Interesting find. Out of curiosity how did you did this get on your radar?

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    1. It was sent to me from a reader, I don't frequent Perfumania's stores, sounds like a asthma attack waiting to happen!

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    2. ha! thanks for the response

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  2. Dunno if you ever took a look at BRT, but they did exactly as expected, though at least 6 months earlier than I'd anticipated, so I didn't have quite as much as I'd planned. They initiated an .18 quarterly dividend and a buyback. I assumed they'd wait until their NOLS were exhausted; as far as I can figure they have ~$5 million left. Ah, well--sometimes being early is wrong, and sometimes being early isn't even early! Still offers a very nice discount to book and decent yield.

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    1. Good one. I did start to look at it and then got side-tracked (happens a lot), but I kept it on my watch-list and saw the news today. I own STAR which is in a similar non-dividend paying spot with NOLs, someday maybe.

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    2. I think buying stocks in companies which have a clear (and stated) path to dividend resumption (or occasionally increase, if that's not adequately understood by holders/market) is a very good strategy, not least because it's like watching paint dry--not exciting enough for short term traders. Taiga, Noranda Income and Cathedral Energy are 3 tiny Canadian cos I'm looking at, though I have to check that Cathedral hasn't changed its position on resuming distributions when possible.

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  3. Wondering if you have looked at or are considering writing about the upcoming Consol Energy Spinoff? Thanks again for your blog.

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    1. I have been following along and at a high level it looks interesting, my issues is valuing the parent/natural gas company, what's the right way to do it? I've struggled valuing E&P's over the years, but I like management and if you go back to some of Einhorn's presentations on CNX, you can see the potential value there. Thanks for reading.

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  4. Agree that valuing E&P is extremely difficult. Like management and the board chair and think the incentives are aligned. Also intrigued that just about everybody is completely bearish on natural gas the long term. Throw in that Einhorn rarely averages down (which he has done quite a bit of here) and I think the risk-reward is favorable. We shall see. Keep up the great work with your blog and investment returns.

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  5. What did you think of the ITEK announcement. Do you still own?

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    1. I don't know what to make of it so I sold a bit above $1.20, mentioned it in the other thread. Good outcome, could be great, but I just don't know enough about biotechs or gene therapy technology to make an informed decision.

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  6. Hi MDC - If you are looking for new ideas, take a peek at BW. Very much hated story due to a recent restructuring deal with a Fund - another combative fund (Vintage) recently bt 15% of the stock but has not taken an activist stance (13G). May be worth your time. Best. XFL

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    1. Thanks - I looked it the first time it got smoked, on my list to re-visit.

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  7. While it's not surprising that PERF has had *11* consecutive quarters of revenue decline, I wonder how gross margins have stayed relatively flat in the face of that collapse? You can see here:
    http://www.rocketfinancial.com/Financials.aspx?fID=8599&p=1&pw=283725&rID=1&tID=1&stID=1

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    1. Good catch, can't think of anything immediately? I hoping it doesn't matter and the plan gets approved at $2.

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