On Wednesday, while I was writing about Retail Ventures' (NYSE: RVI ) recent third-quarter earnings, the retailer announced the decision to explore selling its Value City Department Stores business. While I was disappointed in management's recent financing decisions, I think this financing decision makes sense.
Retail Ventures was originally created in 2003 as a holding company for DSW (NYSE: DSW ) , Filene's Basement, and Value City Department Stores. The retailer originally went public in 1991 under the Value City moniker. Value City went on to purchase the DSW shoe business in 1998 and Filene's Basement in 2000.
It's hard to guess what Retail Ventures will take for the Value City business, but I hope the board will be flexible in its negotiations. Using Value City's 12-month-trailing sales of $1.4 billion and a price-to-sales multiple of .25, I estimate Value City's worth at $343 million plus debt. Assuming debt of $128 million, the enterprise value would be $460 million and priced at an enterprise-to-revenue multiple of .34. I'm not sure whether I included enough of a discount to its peers or enough debt, but if I were management, I'd probably settle for even less -- even if it means selling under the $450 million listed book value.
Regardless of my estimations, management should take what the market offers. Even though recent operating results show improvement, Value City is a drain on cash flow, with operating losses of $169 million over the past 12 months. Value City isn't equipped to compete with general discounters Wal-Mart (NYSE: WMT ) and Target (NYSE: TGT ) or with specialty discounters like Dollar General (NYSE: DG ) or off-brand clothing specialist Ross Stores (Nasdaq: ROST ) . Value City hasn't kept up with the times, quite simply, and so the company's assets should be reallocated.
Even though I think the decision makes sense financially for Retail Ventures, I wouldn't touch the stock. You now have a public company that holds 63% of DSW and 30 Filene's Basement stores. It doesn't look like there's much of a future for the holding company even if the balance sheet were considerably healthier. As an investor, I'd suggest focusing on the less complicated story of DSW.
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