The Bombay Company: Going Back To Its Roots

Although I fancy myself as a technician, I am always on the lookout for opportunities in the retail sector as I hunt for the latest bargain. It was Peter Lynch who attracted me to the stock market and it was his books that taught me some fundamental lessons that I utilize today. His tale of a ten bagger with his purchase of Super Cuts left an impression on me as he happened across the investment as a customer.

I recently found myself in a Bombay Company (BBA) in Huntington, New York shopping for the items listed in the window as 40% off. I was overwhelmed with the number of items that were 40% off. It wasn’t long before I realized that everything in the store was marked down dramatically. My antenna went up because I sensed that either the store or the company is going out of business, or that change is coming. I got to speaking with the store manager who had been with the company for some 20 years. He gave me the run down on how there had been a management change and that The Bombay Company was going back to their roots. He brought me in the back room and showed me the new products that would be coming this cycle. Over and over again he said passionately” we are going back to our roots”. From my conversation with this gentleman I was able to conclude two things: First of all, that The Bombay Company has passionate employees and passionate employees who like what they sell and often sell a lot of it. Secondly, the company was going back to the types of products that had made them successful in their hey day.

Back in my office I decided to do a bit more research and sure enough I found the “new” I was looking for. In June 2006 the company hired CEO David Stewart, formerly of Blockbuster Canada, who quickly went to work establishing an aggressive turn around plan.

The company under its former name, Tandy Brands, reached an all time high of around $33.00 per share in l993 and was taken down in the bear market of 1994 and it never recovered. In 1990 it changed its name to The Bombay Company Inc. which did quite little for sales. It currently has 453 stores down from 498 in 2005 reflecting closing of underperforming stores. Their internet business grew by 37% in 2006 which has the added benefit of expanding margins. The company has reduced it’s workforce at its corporate offices.

Insiders have shown confidence in the turnaround plan as they have been purchasing shares since June 06’ with no sales. The stock currently trades at $1.11, so essentially its the cost of an option with no expiration date.

On a technical basis now appears to be a good time to begin accumulating shares. For purposes of disclosure I began buying shares this past Friday and will add shares as I see the technicals improve. The company has analyst coverage by six firms, two of which raised their opinion of BBA in the past 8 months.

This is a speculative play to say the least, but with the selling pressure finally easing, the time may be right to take another look at this Wall Street darling from long ago.

BBA 1-yr chart

Disclosure: Author is long BBA.

Comments

[koreanjohn32:]

When a public company starts failing dramatically, the wrong thing for a board to do is to simply try to raise public confidence by hiring the next CEO, without really thinking about what they can actually bring to the table.

When I read about Stewart's leadership for Bombay, I realized that the Board of Directors were simply grasping at straws to buoy investors. Stewart's expertise (and his age, mind you) is in a vastly different business segment than what's required in home decor. The success of home decor is ever closely tied with fashion. How does someone of his "talent" translate success at a movie rental service into reviving a failing home decor house? The stretch is so obvious that it's almost sickening.

A smart group of directors would have stopped and taken their breath. They would have held onto the rail of the boat they were on in stormy seas, and realized that they needed to take stock at where they are and how they got there. They would have realized that they needed to make some critical changes in their approach by comparing how successful decor houses approached product design and development and how Bombay differs. They would realize that they needed to make changes and done so.

2007 Jul 17 02:10 PM