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<< See Part I

Previously, we saw that Syms Corp. (SYMS) sits on a mound of really valuable real estate. In this post, I will discuss how the operations of the company look, and their potential.

Activists At The Gate

The company went through some tumultuous times with a vocal and large minority shareholder called the Esopus Creek Advisors. Here is their original 13D from 2008. One of the things that they had called for, was a nationally recognized real estate firm to come in and appraise all of the real estate holdings of the company... For reasons that I will address, I believe that this should be done, with the results being made public, so that investors can get a good idea of how to properly value the company.

Marcy Syms, the CEO of the company responded to the activists with a scathing and rather witty letter. As a result of the battle, the company was even covered by footnoted*, despite it's small size. I highly suggest that you scroll down and look at the comments section of the footnoted* write up, as the activists left some interesting thoughts.

Filene's Basement Acquisition

The company bought 23 Filene's Basement stores out of bankruptcy nearly 2 years ago paying under $40 million out of pocket. While it has been great for revenues, it hasn't done much for earnings. One good thing that has come from the acquisition, which we most likely have yet to see all of the repercussions from (it was just over 1.5 years ago), is that the company basically doubled its purchasing power, and got a lot of name recognition through the iconic Filene's brand. Since the acquisition, as is outlined in the company's 10Q, the company is working to become more efficient by changing distribution methods, reducing corporate headcount, and closing unprofitable stores.

When the company purchased Filene's they didn't do it alone, they did so alongside The Vornado Realty Trust, and apparently took the company from the likes of Men's Wearhouse (NYSE:MW) after they couldn't find financing and Syms offered to acquire more leases as part of a greater turnaround. Under the Vornado part of the purchase, they paid a hefty sum to be able to amend some leases.

Speaking of the turnaround, Syms has only had a little over a year and a half of reporting to show how they have gone about restructuring Filene's. It seems that there will be great benefits in the efficiencies that Syms believes it can achieve.

The company recently announced that it will be laying off 108 employees in Secaucus, which a local newspaper believes make between $25K and $35K a year. This will save the company over $4.3 million annually if it does not replace them and it costed $40K to employ each of the workers.

Again, this has yet to be reflected in their financials, as they did not make the layoffs until January 30th of this year. Total, there will be 210 position eliminations in part due to a change in distribution in Massachusetts. At a guess of $40K per job, this will be a total of $8.4 million in savings over the next year! There have also been one time expenses related to the restructuring which will not appear with such frequency in the future. (Page 9 of their 10Q)

Here, Marcy Syms speaks at the NASDAQ closing ceremony about the future of the combined entity. Here is a video, which is about the moat provided by the good name of Filene's Basement. Thanks goes to "carvel46", as they alerted me to it.

Could Insolvency Actually Be THAT Bad?!

When a company is written up as one that is a cigar butt due to its losses, one should wonder "what is wrong here?" Given the types of losses that Syms has, I am personally not worried too much for a few reasons. First, a significant chunk of the losses come from depreciation, which, when looking at a discount retailer with real estate holdings of this nature, I don't feel are 100% losses.

Syms will be able to juice many of their allocations for well longer than their useful life according to their accountants (things like metal clothing racks generally don't break). Furthermore, it seems like revenue should pick up rather soon, as the company, along with the nation, emerges from the recession. When a company's revenue rises, it can be pretty high margin revenue (for example, as a customer, I will be more apt to buy an extra 2 shirts and 3 ties in a visit).

Maybe I'm missing something along the line of earnings and cash burn; even if the company does manage to go insolvent, there still seems to be little reason to worry. It is important to remember that insiders own over 1/2 of the company and in the event that the company is reorganized, they will fight tooth and nail for the common stock holders.

Furthermore, since the company leases a significant portion of its locations, it could potentially be able to sell off unprofitable assets, renegotiate unfavorable leases that could be left from the Filene's Closet acquisition, or even shutter the stores. When sitting on the type of "Class A" assets that they hold, this is one of the few situations, like General Growth Properties, where it might actually be favorable for the company to get in the situation to reorganize.

Liquidation

While there is virtually no chance that the company will be liquidated, a liquidation valuation must be looked at when calculating a margin of safety. As is, the company is trading at 1/2 of book, which, I feel is well below an orderly liquidation value for the company. If the location at Trinity is worth $40 million, that adds substantial gains to the book value.

When looking at the real estate portfolio and valuing the continuing operations at, say $500K per store (which could potentially be super low, especially if there is any significant pick up in same store sales), I have no problem believing that this company is better than a 50 cent dollar. If given some time to run, the company is better than a 30 cent dollar, or, worth more than $300 million.

Thoughts On Management Vs. The Activists

While I certainly have a history on this blog of being sympathetic to activist shareholders, this is one of the first cases in my memory where, at the present time, I wouldn't support activists if they tried to take the company over.

While management seems to have generated bad returns in the short run, related to the Filene's Closet acquisition, I think that things will eventually work out. Additionally, I don't see why the company would purchase the air rights above the Trinity Place location if they didn't plan on doing something worthwhile with the location. With this said, I will reiterate that the activists do have some great ideas; I would love to see the company give more specific plans for some of the real estate holdings (such as 42 Trinity) and make public the real values of all of their real estate.

Additionally, the company does have a history of share buybacks. Over the past 3.5 years, the company has repurchased just over $2.25 million in stock (It would be nice if they would repurchase a lot more in the coming quarters). While addressing issues that are left to the board to decide, I like the types of connections that the directors have with retail operations and Asian producers, as are outlined in their most recent proxy.

Furthermore, Marcy Syms once wrote in her book which was published nearly 2 decades ago, that:

Most importantly, you’ll be working for a company that cares more about staying in the business than making next quarter’s figures. That’s the family’s job—to keep the business healthy for the generations to come.

This is the sort of thing that I love to hear from management. And frankly, despite the fact that it seems they are underpreforming based on their asset size, this makes me more certain that the company will be around for some time, and that it will thrive. The fact that the company bares the founding family's name, should serve as incentive, in the same way that the name change of Steak n' Shake to Biglari Holdings gave Sardar Biglari incentive, to not do something overly stupid and company destroying.

There has also been governance concern over the family attempting to take the company private. And who could blame them? I'd want to take the company private too.

However, due to having large outside ownership (which reduces float, meaning that a few amount of people purchasing shares can do a lot to raise the price, especially in a short squeeze), I am not concerned, as they will do all that is in their power to keep any governance issues in check.

Interestingly, when the company attempted to deregister its stock, the activists threatened to split up their shares into a plethora of directly registered holders of common stock, making the delisting impossible according to SEC rules, which, I am glad about.

As a minority shareholder, I hate the idea of the shares being traded over the counter, despite the cost savings of as much as $750,000 that it would provide. Additionally, when not reporting with the SEC, you don't have such stringent reporting requirements, which, the company could have potentially used to hide some of its real estate investments, in an effort for management to take the company over on the cheap.

However, it doesn't seem that this will ever be able to happen due to the position held by the activists- who seem to be incredibly informed about all the matters of the company. When this de-listing attempt happened, it scared away many investors, but it is unlikely to happen again in light of the previous actions of the activists.

Here is a speech that Marcy Syms gave in response to all of the above concerns, her writing seems sincere.
Overall, it seems that management is self interested, which, when controlling the company, is great, provided that you have a great check and balance to prevent abuse, which is exactly what they guys at Barington Capital and Esopus Creek Advisors provide us.

Here is a video where Marcy Syms talks about the business. One last snippet about Marcy comes to us from this New York Times article. Apparently, as a kid, she remembers clipping coupons and going to 3 different grocery stores to save the most money on food so that the business could operate better. Additionally, when she doesn't buy her clothing from our Syms stores, she gets them from flea markets, tag sales, and Costco. That is the kind of frugality that I like to see instilled in management from a young age!

The Conclusion

Management has the ability to be very shrewd when it comes to owning land. By extension, even if they could be replaced, they don't need to be. I am 100% certain that Syms sits on a mound of valuable real estate, and I am pretty sure that pieces of it will be monetized at some point in the future; the recent sale of a location shows the company does know when to selectively sell off assets (granted, it may have been done due to temporarily low cash reserves), any additional sale of which, can be a great catalyst.

Additionally, profitability, which, I believe is coming, would be a nice catalyst. I don't know exactly when it will be, but, with the company trading at ~1/2 of it's stated book value (which, seems to be super conservative) a patient investor can wait for a while and do quite well; if it takes 3 years for the price to just to get to the stated book value, you are looking at a 23%+ annualized return... not too shabby.

In the mean time, a Syms shareholder gets the comfort of sitting on a huge margin of safety, all while in the middle of some pretty turbulent economic times, when many companies seem to be close to, or at full valuations. This is a company that seems to be anything but mediocre, based solely on valuation alone.

To sum up, I feel pretty safe in this one... provided that the whole of the east coast doesn't get blown up (and destroying the company's real estate), I should do fine owning this stock.

Disclosure: Author is long SYMS. While all information is believed to be correct at time of publication, no assurances can be made. This is not investment advice. Always do a ton of your own research when contemplating doing anything that I talk, write, or so much as even think about.