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Tag-It Pacific Inc. (NASDAQ:TAG) stock has been on the move recently, having doubled from just under .70 in early August to a recent high of $1.38. Tag-It's Q2 results from mid-August evidence progress deriving from a restructuring initiated in August 2005, and the company appears to be in the early stages of an earnings turnaround. Though obstacles remain on the path to recovery, the company is clearly headed in the right direction, and readers can benefit by acquainting themselves with this name. Lets take a closer look.

Tag-It Pacific specializes in the distribution of apparel zippers and trim items (buttons, snaps, labels, etc.) to manufacturers of fashion apparel, specialty retailers, and mass merchandisers. The company manufactures and distributes zippers under the TALON brand name to manufacturers and retailers such as Levi Strauss & Co., Wal-Mart, and JC Penney. Tag-It also acts as a full service outsourced trim design, sourcing, and management department for manufacturers of fashion apparel such as Abercrombie & Fitch Co. (NYSE:ANF), and serves as a specified supplier of trim items to owners of specific brands and retailers. Additionally, the TEKFIT division develops and sells apparel components that utilize the patented Pro-Fit technology, including a stretch waistband sold to Levi Strauss & Co utilized in Docker's slacks.

Following a string of losses and last year's restructuring, operating income turned positive in the second quarter. Significantly, gross margins came in at 28.9%, up from 14.4% the year before (after adding back a $1.5M inventory obsolescence charge in Q2 '05.) There have been a lot of charges in the numbers in the recent past, which can make things look un-clean, including bad debt reserve provisions, inventory writedowns, ongoing legal expenses, and Asian relocation expenses. Last year's restructuring was designed to eliminate low-margin, poor quality trim and thread customers in Mexico (prone to doubtful receivables), while attracting high-margin, high quality customers within Asia. Though total revenues are down for the first half year-over-year ($24.9 vs. $28.7 mil), the plan is working so far, with Asia accounting for 59.4% (32.9% last year) of revenue and H1 gross margins going from 19.2% to 28%. Also during the first half, inventories have been getting cleaned out, cash is up, and receivables collection has been improving. EPS for Q2 came in at .04 on 18.6 mil fully diluted shares.

But there's downside. Shareholder equity at the end of Q2 stood at under $1.1 million, considerably less than the $4 million required by AMEX to ensure continued listing. Tag-It has successfully submitted a compliance plan to the exchange which explains how the company will reach the requisite level of shareholder's equity (via retained earnings) which will be subject to periodic review through Nov. 16, 2007. The good news is that cost savings achieved through the restructuring look to be in the neighborhood of 800-900k per quarter, taxes won't be much of an issue ($54 million Federal NOL [net operating loss] carryforward -- so they could make it on cost savings alone) and China, India, and Bangladesh can prove to be drivers for the TALON zipper business in the second half and into 2007.

However, the company doesn't break down revenue by segment. This is an issue when one considers there's a lawsuit pending with Pro-Fit over an exclusive licensing dispute involving the technology behind the expandable waistband used by Levi's Docker's brand. Management merely acknowledges that the company through its TEKFIT division "derives significant revenue" from the waistband technology, and that operations could be materially affected by this litigation. There's also the issue of a class-action shareholder lawsuit pending for the period of Nov. 14, 2003 to Aug. 12, 2005. Finally, even though cash is up from $2.27M at 12/31 to just under $4M today, there's long term debt of $14.5M, and with just the one quarter of positive earnings under the company's belt, auditors saw fit to place a going concern paragraph in Tag-It's most recent quarterly filing.

TAG 3-yr Daily Chart
Tag-It Pacific remains a work in progress. Further expansion for the zipper business in Asia is probably the company's best bet for near-term revenue and earnings gains. Meantime, the company is looking to expand the number of brands utilizing the elastic waistband technology even as the lawsuit pends. The trim division, instead of selling low-margin pre-assembled trim kits, is being repositioned as an outsourced sampling department for brands and retailers to differentiate their trim designs. Management is optimistic that gross margins will continue to expand as old inventory continues to deplete, and is calling for G & A (administrative) expenses to remain generally constant for the remainder of the year.

TAG stock at $1.14 could represent a nice opportunity for patient, value-oriented investors. With the company on pace to do just under $50 million in sales this year, the equity is selling for less than .43x sales. The compliance plan accepted by AMEX necessitates close to an additional $3 million in retained earnings, or a minimum .16 diluted EPS over the next 5 1/2 quarters. It is also worth noting that 48% of shares are held by insiders and family, and a recently appointed board director bought 102k shares in late August at $1.15. The stock doesn't have "home run" written all over it -- but considering the low valuation and turnaround prospects, Golden Mean Stock Report considers TAG stock interesting at the current price level. Tag-It Pacific's 10-Q filing.

Source: A Trimmer Tag-It Pacific