It's funny how one discovery can lead to another, and then another. For instance, while scanning the Washington Post yesterday, I came upon a mini-article describing textbook-seller Varsity Group's (NASDAQ:VSTY) acquisition of school uniform company Campus Outfitters in a deal concluded late last week. You may recall that several months ago, I wrote a piece on Varsity rejoining the Nasdaq after a multiyear absence. In that column, I noted that master value investor Peter Lynch owned a significant 6.7% stake in Varsity.
On seeing the latest good news about the company, I decided to check the SEC filings and see how much Varsity's latest news might affect Lynch's fortunes. Answer: about half as much as it would have last year. According to the SEC, Lynch took some of his winnings off the table between February 5, 2004, and February 5, 2005, and now owns "only" 3.4% of Varsity's shares.
That's a pity -- although a glance at Varsity's stock chart suggests where Lynch may have unloaded many of his shares, and also suggests that he may have obtained a very nice price for them. Still, after reading Varsity's own press release and listening to its conference call on the Campus acquisition, this looks like a very attractive deal.
Excluding certain unquantified liabilities that Varsity will assume, at the purchase price of $3.8 million, Varsity is paying about 0.6 times sales to acquire Campus. Varsity itself currently sells for 2.5 times sales, making this look like quite a good bargain. It will be even better if Varsity can pay the bulk of the purchase price in its own stock, which commands a significant premium to the price-to-sales (P/S) ratios sported by other booksellers.
These other booksellers (and admittedly, some of these aren't exactly "pure plays") include net denizens Amazon (NASDAQ:AMZN) and Overstock (NASDAQ:OSTK), which sell for 2.0 and 1.4 times sales, respectively; and cheaper bricks-and-mortar retailers Barnes & Noble (NYSE:BKS), Borders (NYSE:BGP), and Books-A-Million (NASDAQ:BAMM), all three of which sell for less than Campus Outfitters' 0.6 P/S. It's also worth pointing out that all five of those companies earn gross margins less than the 32% that Varsity commands.
That's especially significant when you note that Campus brings not just another $6 million to $7 million in sales to Varsity's table this year. Campus also brings with it 50% gross margins on those additional sales. No wonder Varsity believes that the purchase will start adding to its earnings by fiscal 2006.
Want to find out more about Varsity's prospects? Run your questions by the experts on the Fool's own Teachers discussion board.
Fool contributor Rich Smith has no interest in any of the companies mentioned in this article.
