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Syms and FileneDiscount retailer Syms (SYMS) recently received a major insurance payout following the passing of founder and chairman Sy Syms. While the company remains controlled by the Syms family, positive changes may be expected over time as younger family members seek to extract value rather than sit on a stagnating asset. In the meantime, Syms’s opportunistic purchase of bankrupt Filene’s Basement enlarges the company’s share of the discount clothing market and positions the business to benefit from an upturn in consumer spending. The downside is protected by a strong balance sheet, with modest net cash and ownership of 1.9 million square feet of real estate associated with 21 stores. The value of the real estate alone may exceed the recent market value of the company, implying that the $500+ million retail business is essentially being given away. While no immediate catalyst to value realization is evident, we view the valuation discount as too large to ignore.

BUSINESS OVERVIEW
Syms operates retail stores offering discounted merchandise from designer labels for men, women and children. Syms opened the first store in 1959 and currently operates 53 stores, including 23 Filene’s stores acquired in 2009.

COMPANY-OWNED REAL ESTATE
Syms Owned Real Estate
Source: Company filings, The Manual of Ideas analysis.

INVESTMENT HIGHLIGHTS

  • Owns real estate associated with 21 of 30 Syms-branded retail stores, with retail space of 1.2 million sq. ft, warehouse/office space of 350k sq. ft (including 19 acres of land) and other space of 391k sq. ft. The PP&E is carried at $96 million but is likely worth substantially more. One owned store is located in NYC, while the others are generally near highways in places with at least one million people.
  • Won bankruptcy auction for Filene’s in 2009, adding 23 leased stores and $315 million revenue (based on November 2009 quarter-end annualized revenue). Syms paid $39 million in cash, and also acquired $21 million of inventory, $30 million of store fixtures, and the Filene’s brand. Syms recorded a related $10 million bargain gain.
  • Retail concept: Sell brand-name apparel for less. Brands carried by Syms include Burberry, Ralph Lauren, Calvin Klein, and Tommy Hilfiger. Filene’s stores also offer “off-price” branded apparel and are located in similar markets (mostly in Eastern U.S.).
  • Received $30 million of insurance proceeds in December related to death of chairman Sy Syms. CEO Marcy Syms (57) has become chairman.
  • Pro-forma net cash of $8 million as of November 28, 2009 (includes $30 million insurance windfall).
  • Shares trade at 0.6x tangible book value and 0.2x enterprise value to pro forma trailing revenue.

INVESTMENT RISKS & CONCERNS

  • Syms-branded same store sales fell 10% in June-November of 2009. Despite revenue pressure, "clean" EBIT was $1+ million in FQ3 on revenue of $135 million, including full Filene’s contribution.
  • Controlled by the founding Syms family, which owns 56% of the company. While the passing of Sy Syms may lead to changes down the road, CEO Marcy Syms, who draws a $600,000+ base salary, appears firmly in charge and set to continue.
  • Competes against discount stores, specialty apparel stores, department stores and factory outlet stores, with few sources of competitive advantage.
  • Low returns on capital. Although the purchase of Filene’s leased stores lowers incremental capital intensity, capital remains tied up in owned property.

MAJOR HOLDERS
Syms family 56 % | Other insiders <1% | Franklin 10% | DFA 8% | Kahn Brothers 3% | Barington 2% | MFP 1%

VARIANT VIEW

Syms appears to be covered by only one sell-side analyst who appears not to have adjusted his model to reflect the transformative Filene's deal, which closed last year. As a result of the lack of credible sell-side coverage and as a result of the company's small size, Syms may simply be overlooked by most investors. It would be easy at first glance to simply dismiss Syms as a sleepy retailer with corporate governance issues, without realizing that the company has huge real estate holdings relative to its market value.

We also believe that the recent passing of Syms founder Sy Syms may catalyze some changes that could benefit shareholder value over time. Of course, this is purely speculative at this point, but it wouldn't be the first time that the passing of a company founder leads to actions that allow his family members to monetize their equity stakes in the company.

Finally, the market does not appear to have digested Syms's opportunistic acquisition of certain assets of Filene's Basement as part of the latter's bankruptcy proceeding in 2009. Filene's is a strong brand in the off-price apparel retail segment, and Syms could benefit from the increased scale of operations. Syms's historical results do not yet show the anticipated contribution of Filene's Basement.

SELECTED OPERATING DATA
Syms Operating Data
Source: Company filings, The Manual of Ideas analysis.

Disclosure: No positions

Source: Syms: Overlooked Retailer With Big Real Estate Ownership