What does mediocre look like? A lot like Yankee Candle's (NYSE: YCC ) third-quarter earnings report, in fact.
Of course, I'm in the distinct minority with that assessment. Investors are partying today, thanks to a $1.7 billion buyout offer for the firm. Shareholders will cash out their positions at $34.75 a stub, a 21% premium over yesterday's close. Private equity financier Madison Dearborn explained its purchase by telling the Chicago Tribune that it believes that Yankee Candle is "well-positioned for growth."
It certainly seems that way on the surface. Sales of $159.6 million for the quarter and per-share earnings of $0.37 easily beat Street estimates. Meanwhile, same-store sales (or "comps") were up 8% in the quarter and 7% year-to-date from the year-ago periods. Both are good numbers.
But the report begins to go bad on the bottom line. There, Yankee Candle earned less than last year. How's that possible when earnings on a per-share basis improved by $0.02? Debt. Interest expense nearly doubled year over year, bleeding into earnings.
Poor cash management may be to blame. Total debt increased 40%, or $81 million, year over year. And while the earnings report offers no cash flow statement, a check of its past history shows that Yankee Candle repurchased $127 million worth of shares over the trailing 12 months ended in July. At the end of that period, free cash flow equaled only $68.1 million (a decline of 22% from the year-ago period), which left $58.9 million in share buybacks to be funded by debt. Of course it was.
Meanwhile, it's difficult for me to consider the Madison Dearborn buyout a referendum on the strength of the underlying business. In plain fact, private equity firms are flush with cash. Madison, for example, recently raised a $6.5 billion fund. And the Tribune reports that $465 billion worth of private equity buyouts have been made this year alone.
That's a remarkable stat. When combined with Yankee's mediocre results, it makes me wonder: Did a cagey investor really see a value here? Or was this just another opportunity to "put money to work" as venture capitalists did in the roaring '90s? Time will reveal the truth, of course. But I'll be thoroughly unsurprised if it proves to be the latter.
Allow us to light a path to related Foolishness:
Fool contributor Tim Beyers lights the house with Yankee candles when the power goes out. Tim didn't own shares in any of the companies mentioned in this story at the time of publication. Get the skinny on everything Tim is invested in by checking his Fool profile. The Motley Fool's disclosure policy is a beacon for Wall Street.