What Has Bon-Ton Soaring Higher

Don't let it get away!

Keep track of the stocks that matter to you.

Help yourself with the Fool's FREE and easy new watchlist service today.

Bon-Ton Stores (NASDAQ: BONT  ) traded higher by a whopping 40% in the two days following the company's third-quarter report. At first glance, the report does not look strong, but the stock performance that follows is a good lesson on what drives value in the market.

A fundamental glance
Bon-Ton is a department store operator in the U.S., selling an assortment of brands that appeal to a variety of consumers. The company is valued at $400 million, trading with losses greater than 60% since before the recession.

Its main problem has been a combination of low margins and a high debt load, which has made Bon-Ton one of the most heavily shorted stocks in the market.

With that said, the fact that Bon-Ton performed so well following earnings might have something to do with its high short interest, as such stocks have the potential to reverse quickly when or if shorts cover their borrowed shares.

If we look at the company's quarter, it's hard to identify what created the excitement. The company saw its total sales decline 2.6% year-over-year, which was a result of a 2.8% decline in comparable-store sales.

The company did improve its operating income by $5 million to $15.9 million. However, the quarter was still unprofitable.

Growth is not created equally in the stock market
In comparison, we've seen countless retailers announce earnings this season, many with strong comparable-sales growth but which did not trade higher or did not trade with the same level of gains.

For example, Macy's (NYSE: M  ) , a similar yet larger company, saw its comparable sales grow 3.5% and expects such growth to continue throughout the remainder of this year. The company also saw its net income grow 22%, significantly outperforming revenue. Yet its stock only increased 10% after earnings, although it has climbed 13% since the quarterly report.

On the other side of the spectrum, Best Buy (NYSE: BBY  ) saw its U.S. comparable sales grow 1.7%, much greater than Bon-Ton, and its stock declined 6%. Target (NYSE: TGT  ) , a large retailer and a great gauge of retail strength, saw comparable-sales growth of 1% in its last quarter, yet its stock declined 4%.

What creates gains?
Clearly, Bon-Ton has had the worst fundamental performance of the noted companies but has seen its stock surge, by far, the most. But the big question is why.

The answer lies in valuation, and in a market that has disregarded the value of a company in several industries, it is a good lesson to remember.

Now, as I said, Bon-Ton is barely profitable, having a profit margin of 0.3% over the last 12 months. Therefore, compared to the likes of Macy's or Target, you really can't compare P/E ratios, because the level of profit is so disconnected.

Moreover, in an industry with heavy discounting, being a high-margin company actually poses a risk, as much of a company's valuation is based on its ability to maintain margins. Thus low-margin companies that already discount heavily become attractive.

With that said, take a look at the noted companies' valuation relative to annual sales:


Price-to-Sales Ratio





Best Buy




Take a look at how cheap Bon-Ton is compared to its peers. The only company that comes close is Best Buy, and it has seen stock gains of 240% in the last year with near-zero growth.

With that said, you might wonder why sales are important in valuing and assessing upside potential for a stock. The answer is that sales are the fundamental driver for all companies: Margins, cash-flow, and all profits are created from sales. Therefore, revenue itself is the main building block to any company's future.

Companies that trade at higher multiples to sales often earn more profit per dollar. Case in point: Macy's has an operating margin of nearly 10% while Best Buy's is only 2.4%. In the case of Bon Ton, it is selling many of the same items as Macy's but trades at a considerable discount.

This discount and the third-quarter margin improvements are why Bon-Ton has seen gains of 40%. And since it is so much cheaper than its peers, expectations are lower, which then means that stock gains are greater.

Final thoughts
With the markets sitting at all-time highs, investors must remember that momentum stocks with higher margins and greater premiums to fundamentals also have higher expectations. Theoretically, the market or a stock will rise until expectations become too high, which then causes expectations and the stock to trade lower.

Hence, Bon-Ton is still cheap with low expectations, and this fact means that it might actually be a good retail investment opportunity now. 

Rulers of retail
To learn about two retailers with especially good prospects, take a look at The Motley Fool's special free report: "The Death of Wal-Mart: The Real Cash Kings Changing the Face of Retail." In it, you'll see how these two cash kings are able to consistently outperform and how they're planning to ride the waves of retail's changing tide. You can access it by clicking here.

Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2744312, ~/Articles/ArticleHandler.aspx, 9/27/2016 11:44:07 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated Moments ago Sponsored by:
DOW 18,158.69 63.86 0.35%
S&P 500 2,154.56 8.46 0.39%
NASD 5,284.54 27.05 0.51%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/27/2016 11:05 AM
BONT $1.68 Up +0.02 +1.20%
The Bon-Ton Stores CAPS Rating: *
BBY $38.19 Up +0.68 +1.81%
Best Buy CAPS Rating: *
M $36.40 Up +0.16 +0.43%
Macy's CAPS Rating: **
TGT $68.22 Up +1.00 +1.49%
Target CAPS Rating: ***