Retail Ventures' Hidden Value

Sometimes a stock can be so misunderstood and underfollowed that a major mispricing can occur. This is what has happened with the stock Retail Ventures (RVI). The discount retailer headquartered out of Columbus, OH, which owns Filene's Basement and DSW, is currently undervalued by 100% or more.

The reason is that Retail Ventures on paper looks like a money losing company with a subsidiary in Filene's Basement that could possibly go bankrupt. Moreover, the company is currently losing money, and recently sold its Value City division at a major loss.

What investors are not seeing is the hidden intrinsic value of the comapny's ownership in DSW, a specialty footwear retailer. According to the DSW's SEC filings, RVI, or Retail Ventures, owns 27,702,667 shares of DSW stock. DSW is currently selling at $8.20 a share; therefore the current market value of Retail Ventures' ownership of DSW stock is an incredible $227,161,869. Compare this to Retail Ventures' current market cap of $96.3 million and its enterprise value of $85.2 million, and you can see why this stock is so mispriced.

Currently Retail Ventures is sellling at more than a $130 million dollar discount to its intrinsic value due to its investment in DSW stock. Therefore, for this mispricing to correct, RVI would have to more than double in value.

Now there is obviously the risk that DSW stock could tank and therefore would greatly reduce the value of Retail Ventures' investment if DSW, but you are also getting the entire company, which includes Filene's Basement and any net cash the company would have as a margin of safety, for free.

Another reason why I believe this huge mispricing exists is the incredible amount of insider buying that has occurred in Retail Ventures in the last four months. Jay Schottenstein, the Chairman of Retail Ventures, purchased 5.7 million shares of RVI stock at a value of $13.2 million or $2.30 a share. That price is well above the current RVI share price of $1.90, and that amount represents almost 14% of the entire market cap of the company. Now that is major insider buying.

Disclosure: no positions

Comments

[Johnny Clark:]

I am long RVI. Bought back in December after the huge amount of insider buying, and studying the financials.

I very much agree with your points Mr. Meade, and I would also add that RVI and DSW are both cash flow positive. They have huge depreciation charges which affect GAAP earnings, but cash flow-wise, very healthy.

One question...can you explaing how the PIES work? I notice that every quarter they are making mark-to-market adjustments on this convertible debt. Lately it's been accretive to operating profit, but what can we expect going forward, and why? Another bullish signal...in the most recent quarter, RVI bought back some of it's PIES (about $10m worth).

Mar 30 05:40 PM