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Retail Bargain Shopping With Ron Burkle

Thursday, 05 February 2009 02:57 PM

Ron Burkle is probably best known as a friend of Bill Clinton. Burkle drew attention to himself when he hired Clinton to help identify possible investments for his private equity firm, Yucaipa Companies. The politically active billionaire also raised more than $1 million for the Hillary Clinton presidential campaign.

Burkle began his working life as a bag boy at his father's grocery store. He later dropped out of college and founded his investment company which invests primarily in retail, manufacturing, and distribution.

Retailers, and in particular grocers, have been the largest contributors to his $3.5 billion fortune. In 1998, Burkle sold Dominick's stores to Safeway, earning over $200 million in profits. Later, he led leveraged buyouts of the Jurgensen's, Fred Meyer, Food 4 Less, and Ralphs supermarket chains. He eventually sold them to Kroger for $13.5 billion. Burkle currently holds a majority stake in Pathmark grocery stores.

Recently, Burkle acquired more than 8 percent of bookseller Barnes and Noble and about 7 percent of grocer Whole Foods Markets. His investments totaled nearly $200 million in this beaten-down sector.

In SEC filings, Burkle wrote that he bought shares of Whole Foods because he considered them to be undervalued and thought that there were "substantial opportunities for the company to improve operations and its pricing image while maintaining its high-quality product offering."

For this week's screen, I looked at retailers trying to find value plays that could appeal to Burkle:

  • The P/E ratio should be at or below the industry average, indicating the stocks are undervalued.

  • Five year sales growth must average at least 20 percent a year to find the fastest-growing retailers with sustainable business models.

  • To guard against finding companies unlikely to survive the retail downturn, I looked only at companies showing sales growth in the preceding 12 months.

    There are 10 stocks on this week's screen:

    Aeropostale (ARO) was one of the few retailers to turn in a strong performance during the Christmas season, delivering 12 percent same-store sale growth. The company designs and sells clothing to teenagers. ARO has an industry-best 54 percent return on equity and a P/E ratio of 10 at the recent price of 21.11.

    BIDZ.com (BIDZ) sells jewelry online, through auctions similar to the ones popularized by eBay. Sales growth has averaged 40 percent a year for the past five years and earnings per share increased at an average rate of 33 percent a year over that time span. Recently trading at 3.14, BIDZ appears to be deeply undervalued with a P/E ratio of 4.

    Build-A-Bear Workshop (BBW) is a favorite destination of preschoolers and other children who can make their own plush toys. This stock seems to offer tremendous appeal for the value investor. It has a book value of over $9 a share, more than double the recent share price of 4.20. The company has $1.45 a share in cash on its books. BBW has a P/E ratio of 8.

    Citi Trends (CTRN) operates more than 300 stores specializing in urban fashion apparel and accessories for the entire family. The stores appeal to low- to moderate-income customers. Despite above average revenue and earnings growth, CTRN has an industry average P/E ratio of 9 at the recent price of 9.53.

    CVS Caremark (CVS) operates more than 6,200 drugstores and has projected sales of $96 billion for next year. CVS was a value pick in my recent screen identifying buy candidates using James Simons' methodology. The recent price of 26.88 offers investors a 1.1 percent dividend yield.

    Dick's Sporting Goods (DKS) operates more than 400 stores. This retailer also showed up on our recent Sam Zell stock screen. Analysts expect the largest sporting goods retailer to see earnings growth of almost 17 percent a year for the long-term. With very little debt, DKS should withstand the downturn and gain market share as weaker competitors suffer. Recent price: 11.01.

    Pantry (PTRY) sells more than 2 billion gallons of gasoline a year through more than 1,600 gas stations and convenience stores located throughout the Southern United States. The company typically earns a margin of between 10 to13 cents a gallon. While gassing up, many consumers pick up something to eat at the co-located Dairy Queen or Hardee's. PTRY executes well in a relatively simple business, with high barriers to entry given land costs and environmental regulations. This makes it the kind of stock Warren Buffett would love. The stock was recently trading at 16.63.

    PetMed Express (PETS) sells discount veterinary medicines through the popular 1-800-PET-MEDS service. With more and more cash-strapped consumers turning to PETS to save money without skimping on care for their animals, PETS saw sales increase by 16 percent in the most recent quarter. Recent price: 14.44.

    Whole Foods Market (WFMI) was cited above as a recent Burkle pick. The natural and organic grocer operates 275 stores. Earnings are expected to grow by 13 percent next year. At a recent price of 10.25, the P/E ratio is 13.

    Zumiez (ZUMZ) is a skateboard and snowboard retailer. Over the past 12 months, the company's sales exceeded $400 million in this niche market. Growth stock investors at T. Rowe Price are the largest investors in the company, owning more than 13 percent in their various mutual funds. At a recent price of 7.15, ZUMZ may be an enticing acquisition target for larger retailers.

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    Ron Burkle is probably best known as a friend of Bill Clinton. Burkle drew attention to himself when he hired Clinton to help identify possible investments for his private equity firm, Yucaipa Companies. The politically active billionaire also raised more than $1 million...
    Thursday, 05 February 2009 02:57 PM
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