While fellow Fool Seth Jayson was looking for a bright side to the dim results from retailer Linens 'n Things (NYSE:LIN) last quarter, it's rumored that the board of directors was considering selling the company.
That rumor made the stock one of the NYSE's percentage-gain leaders yesterday morning. Is there room for more price gains?
In the second quarter, the company added 17 new locations, expanding to a total 516 stores. Sales for the quarter decreased 0.9%, and same-store sales fell 6.8%. The company lost $0.13 a share.
Same-store sales are expected to be negative in the third quarter before recovering for the critically important fourth quarter. Analysts expect the company to earn $1.14 this year, down from $1.39 last year. Heck, even when analysts look toward 2006, they only see earnings of $1.43.
Investors are still lured by the possibility that Linens 'n Things can juice its lowly 3.2% operating margins to more closely match Bed Bath & Beyond's (NASDAQ:BBBY) robust 15.4%. That's assuming the company can find suppliers capable of delivering products that click with customers (a failure to do so was blamed for last quarter's shortfall) or regain the sort of pricing power it's lost at the hands of larger competitors. A repeat performance of last quarter's stated shortcoming is a looming threat, another misstep in the company's efforts to deliver desirable merchandise. If its numbers don't improve, Linens 'n Things might find itself marked down with Pier 1 Imports (NYSE:PIR), which sports meager 3% operating margins.
Though the company is debt-free, Linens 'n Things' $22.2 million in cash hardly qualifies as hoarding. In fact, it just about equals the company's negative $22.1 million in trailing annual free cash flow.
Competition comes from a wide spectrum of retailers, from discounters like Wal-Mart (NYSE:WMT) to traditional department stores like Sears Holdings' (NYSE:SHLD) Sears. For that reason, I think it's hard to believe that the company can quickly stem its current downtrend. Its big-box retail rivals wield significant pricing power, which won't do much to bolster Linens 'n Things' revenue growth or help its profit margins.
Nonetheless, at current prices, the company currently sports a 6.7 ratio of earnings before interest, taxes, depreciation, and amortization (EBITDA) to enterprise value (EV). That's far below the 12.3 commanded by premium performer Bed Bath & Beyond, and even below the 7.6 lowly Pier 1 fetches.
Clearly, a corporate buyer could find comparative value in this company; there's significant room for improvement and a pretty cheap valuation. That prospect may have sent the stock up to its new 52-week high on Wednesday. It peaked at 14.1% above Tuesday's close, although the stock settled back to a 9% gain.
Investors would be wise to consider that a buyout may not materialize, and higher gas prices may empty otherwise disposable income from consumers' pockets. That combination could rein in any near-term stock gains for this company. In light of that, I just don't think these linens qualify as investment material.
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Fool contributor W.D. Crotty does not own shares in any of the companies mentioned. Click here to see The Motley Fool's disclosure policy.
