Fools know the value of a stock split: zero. It's a non-event. Instead of a $20 bill in your wallet, you now have two $10 bills. So if they mean nothing, why do them? There are a few reasons, none of which has anything to do with whether the stock is a good investment. Here are the usual ones:
- To make the stock look cheap.
- To increase liquidity.
- To meet stock-exchange listing requirements.
- To express a bullish management sentiment.
Sometimes, though, and usually for reasons not so good, companies effect a reverse stock split, reducing the number of shares outstanding and boosting the value of those that remain. Companies in financial trouble or needing to regain stock exchange compliance (or both!) effect reverse splits.
A split decision
Women's clothing retailer Coldwater Creek (NASDAQ: CWTR) filled that latter description as it effected a one-for-four reverse split to start off the month of October. It went from trading just below $1 a share to just under $4 a stub, primarily to let it keep trading on the Nasdaq exchange. Too many consecutive days in a row below the $1 mark -- the last time Coldwater had been at that price was back on May 1 -- and the exchanges will give you the boot.
But it also says that by doing so it will be able to attract "high quality investors" (sorry, long-suffering shareholders, that's not you) and allow it to complete its turnaround. I'm not certain this will be successful.
Coldwater Creek has been given lifelines before, like this past summer when private-equity outfit Golden Gate Capital gave the retailer a $65 million loan in exchange for two seats on its board. Those kinds of maneuverings have built up large amounts of debt on its balance sheet -- $60 million worth at the end of the last quarter -- but just $45 million in cash (in a fire sale if the retailer was to go under, the $133 million worth of inventory probably wouldn't fetch all that much). That's more than double the debt it started the year with, but with less cash.
Drowning in debt
Crippling debt has been behind the slow-motion demise of supermarket chain SUPERVALU (NYSE: SVU), which now seeks out a private-equity white knight to ride in and save it.
With the retail space littered with distressed companies, private equity is often the only hope retailers have. Talbots was taken private by Sycamore Partners, while Australian surfwear shop Billabong is hoping for a similar buyout, though the lone bidder TPG Capital may renege on its proposed $700 million offer. Coldwater's own sugar daddy, Golden Gate, takes an active interest in such companies and counts Pacific Sunwear (PSUN +0.00%), Eddie Bauer, Express (EXPR +0.00%), J.Jill, and Payless ShoeSource among its ragtag clients.
Of course, it's not just the economy itself that's pinching retailers. Department store chain J.C. Penney (JCP +0.00%) alienated much of its customer base by changing its focus; Sears Holdings (SHLD +0.00%) unsuccessfully thought it could leverage its real estate holdings to transform itself; and Best Buy (BBY +0.29%) flails about trying to grasp any straw to save itself from Internet competition.
A splash of cold water
Not all turnarounds end in disaster. Chicos FAS (CHS +0.00%) is a notable success story, with sales rising 16% and profits expanding at a 23% clip while Ann Taylor parent Ann (NYSE: ANN) enjoyed a 34% jump in earnings on a near-7% increase in revenues.
But Coldwater is no Chicos or Ann. It's burning through cash at a rapid pace and hasn't been cash flow positive since 2010. Comparable-store sales continue to slide, and it expects third-quarter comps to trend that way as well, as losses mount and range between $0.16 and $0.20 per share. While analysts at Piper Jaffray like its prospects and rated it an "overweight" up from its prior "neutral" stance, I think the retailer actually has to prove itself more before I'd go anywhere near it. The stock may be up almost 60% over the past quarter, but I'm rating it to underperform the market on Motley Fool CAPS, the 180,000-member-driven investor community that translates informed opinion into stock ratings of one to five stars.
With so much debt, an unproven ability to stock the right product for its customers, and a shaky economy in which consumers have plenty of choices, I don't see the company being able to outperform the broad indexes. The one hope it has is that some private equity firm does come to the rescue and bails it out. Let me know in the comments section below if you agree a buyout would be best for Coldwater Creek.
