The story goes something like this: the company has been around for a long time making their nice slippers, but weren't quite ready for when globalization hit for real. And hit it did. As the company started going head to head with companies selling similar products much cheaper due to super low cost overseas manufacturing they started to take a hurting. After eeking out a small profit in 2001, the company lost nearly $12m on about $120m in sales in 2002. Losses ballooned in 2003 on very slim sales growth and there was more of the same in 2004.
In 2004, though, the company revved themselves into restructuring mode and, among other things, brought in a new El Capitan and started outsourcing their manufacturing to China. The results? The company turned a profit of $8m for 2005 on $105m in sales. While they didn't stay profitable for the first quarter of 2006, this is really a business heavily weighted towards the second half of the year.
The question here, though, is whether you can really buy that a company that makes cheap, washable foam slippers and has been doing that same thing since basically 1947 is really going to see much in the way of growth. RG's fiscal 2005 brought investors $0.79 earnings per share, so if they see even 5% growth this year we're looking at a 7.5x forward P/E multiple. Seems low, but on a P/E to growth basis you could be looking at as high of a multiple as 1.5x if you think they'll grow at an average annual rate of 5%.
If you like turn-around stories and are hungry for some risk, this could be a good buy for you. For me, though, the company is in a lousy market with precious little growth tailwind...
Bottom Line: SELL
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