Back in July of this year I wrote an article about the companies that were most grateful to have the NFL lockout lifted. The article pointed out 15 companies in a range of retail, media, and food that would have been hurt financially by a full season missed by the National Football League. Through the research of that article I found a small cap player in the sports merchandise industry that I am writing about today that I believe has the potential to double its share price in the next 12 months and continue its success in its industry.
In that article this is what I had to say about Dreams, Incorporated (NYSEMKT:DRJ)
- Dreams, with a market capitalization of just over $100 million, is a small company that could grow tremendously from a great NFL season. The company operates FansEdge stores and the fansedge.com website selling sporting memorabilia and merchandise to consumers across the country. The company is growing the number of stores and increasing its online sales.
- Jersey sales for NFL players should be up initially and with the likely trade and free-agent frenzies, fans will likely have new players to follow and support with merchandise. This is a great small-cap play on the sporting markets and should be researched and looked at in further detail in a later article.
Shares have actually fallen in the time that the article was written, which creates a great buying opportunity for patient investors. The shares are up over 5 percent as I write this article thanks to November e-commerce revenue increases and results of their Cyber Monday sales. Shares are trading for $2.19 today and I will be the first to point out that when I recommended the shares they traded at $2.63, which is a decrease of twenty percent.
Dreams operates as a retail and e-commerce company with the following brands:
- FansEdge – The primary source of revenue for Drams Incorporated is this sports online retailer acquired in 2003. The company operates out of a 66,000 square foot warehouse in Chicago that provides merchandise of over 200 teams and 1300 individual athletes.
- Field of Dreams – A physical retailer that was founded in 1991 after acquiring the rights to the name based on the famous baseball movie. The company franchises and owns several locations with 11 currently listed on the website. The two most prominent locations are at Caesars in Las Vegas, and inside the Mall of America in Minnesota.
- Greene Organization – Founded in 1991, is involved in sports marketing and athlete representation. Greene Organization also owns a sports auction company SCAC.
- Malcolm Farley Art – A leader in sports based art pieces.
- Mounted Memories – Since 1989, has been a leader in authentic autographed sports memorabilia for collectors all over the World. Currently serves as the exclusive autograph partner of Barry Sanders, Ben Roethlisberger, Dan Marino, Peyton Manning, Eli Manning, Archie Manning, Pete Rose, and several others.
- Pro Sports Memorabilia – Dreams acquired this leader in display cases for autographed and memorabilia goods in 2004. The company has been around for more than 20 years in its industry.
- Schwartz Sports – This company has been around since 2000 and operates in the autograph category and has some exclusive deals with athletes.
- Stars Live 365 – An operation within Field of Dreams in Caesars Las Vegas which helps fans connect with the legends of the game. The store hosts athletes on a daily basis with meet and greets as well as autograph signings.
- Star Struck/Pro Team – Large catalog and internet operator of sporting merchandise and apparel. Operates the official catalog of the New York Mets and was a strategic acquisition of Dreams in 2008.
- Unique Images – Acquired in 2007 by the company to take advantage of its leading position in high end custom framing.
Partnerships in the e-commerce sector have become a growing business for Dreams and help it diversify away from its own brands and also from entirely relying on the sports business. The two most recent signings include Linen N’ Things and Major League Soccer and they add to a growing list of well known sports teams and national companies that count on Dreams to maintain their online stores including:
- Comcast Sports (NASDAQ:CMCSA) - Is a nice addition for Dreams as they previously ran the NBC Sports Shop before that company was acquired from General Electric (NYSE:GE) by Comcast.
- University of Texas – NCAA sports teams online store
- Philadelphia Eagles-NFL football team online store
- Wal Mart (NYSE:WMT) – online store
- Major League Baseball – online store
- JC Penney (NYSE:JCP) – online store
- Majestic – online store
- Chicago Bulls – NBA team online store
- University of Miami – NCAA sports teams online store
- Baseball Hall of Fame – online store
- Chicago Tribune – newspaper online store
- Los Angeles Times – newspaper online store
- Purdue University – NCAA sports teams online store
- Chicago Fire – Major League Soccer team online store
- Miami Dolphins – NFL football team online store
- San Diego Chargers – NFL football team online store
- University of Louisville – NCAA sports team online store
As of writing this article, the number of clients with web syndication by Dreams stands at 72. Back in 2008, only 31 clients were signed by Dreams. The success and showcase of the brands Dreams has syndicated has led to new strategic partnerships and increased revenue from this business segment.
Dreams was founded in 1980 by the current chairman Sam Battistone, who was once the owner and founder of the Utah Jazz (was New Orleans at the time) professional basketball team. The company has maintained several key players on the board of directors including the former founders of FansEdge and Mounted Memories. When acquiring a company it can be important to maintain the person in the leadership role to integrate the business and keep its continued success. Famed investor and entrepreneur Phillip Frost sits on the Board of Directors and is a key shareholder as well. Mr. Frost previously owned Key Pharmaceuticals, which was sold to Schering Plough [now owned by Merck (NYSE:MRK)]. He also was the owner of IVAX Corporation, which later was acquired by Teva Pharmaceuticals (NYSE:TEVA). Mr. Frost serves on several boards including Castle Brands (NYSEMKT:ROX), ContinuCare Corporation (NYSE:CNU) and PROLOR Biotech (NYSEMKT:PBTH) where he is Chairman of the Board. Mr. Frost normally positioned himself well in small-cap companies to help them lead their years of growth or to explore the possibility of being bought out by a larger competitor. Frost’s interest in the company should prove as a key to shareholders looking for long-term value.
Recent earnings and press releases have made the stock look extremely undervalued. On Tuesday it was announced that the company saw a 40 percent increase vs. last year on Cyber Monday. The total of 61,000 orders will bring in $3.5 million for the company from the one day. The third-quarter financial results showed revenue being up 23% to $24.4 million from the prior year’s third quarter. E-Commerce sales increased 39% during that time frame to $18.7 million making up over 75% of sales.
The company has predicted earnings for fiscal 2011, to be reported after December 2011, of $0.06 a share. Dreams maintains $239 thousand in cash and has $0 in long-term debt on its balance sheet. As of November 14, the company was 24% owned by institutional holdings and had 34% insider ownership. Market capitalization has lowered to $94.6 million while the enterprise value of Dreams values it closer to $120 million.
Earnings for the previously reported three quarters were:
- 1st Quarter $23.5 Million
- 2nd Quarter $18.6 Million
- 3rd Quarter $24.4 Million
The fourth quarter is estimated to be $79 million, which would be about a 60% increase from last year’s fourth quarter. This would represent over $3 in sales per outstanding share for the year (based on 45 million outstanding shares November 14). If the company can continue to raise its margin and cross promote its brands to increase its profit these numbers could significantly help earnings per share in the fourth quarter and 2012 going forward.
The company has enjoyed ten years of consecutive high double digit e-commerce growth. FansEdge was the 10th fastest growing e-commerce website in retail chain category and 40th fastest overall in the retail sector, according to Dreams' November earnings slideshow. Website revenue has grown from $20 million in 2006 to $85 million in 2010. The company predicts bringing in $112 million for the current fiscal year from website sales. Web sales made up 76% of the company’s sales in 2010 and are predicted to hit 80% for the current fiscal year making the acquisition in FansEdge seem like a clear winner.
Collegiate Marketing Services – Held the retail contract for stadium sales at the University of Texas. The Longhorns play their home football games at the Dallas K. Royal Memorial Stadium, which holds just over 100,000 spectators. The acquisition fits in nicely with the physical and web presence Dreams has in collegiate and national sports teams merchandising sales.
Comet Clothing was purchased by Dreams to help it gain ownership of the Zubaz brand. Anyone familiar with Zubaz will remember the distinct patterned shorts and pants that at one time were worn by wrestlers, minor league baseball teams, and arena football teams that have since been listed on pop culture lists for worst uniforms and products ever. The company is hoping to cross promote the clothing with its e-commerce partners, which means there could soon be Zubaz pants appearing at more and more professional sporting events.
In November the company showed off one of its newest technologies to help with holiday sales. Touch screen kiosks that will be available at several of the company's NCAA and NFL partnering stadiums to help shoppers avoid long lines and select products in the stadium that can be delivered directly to their house or to another home as a gift. This wasn’t an acquisition by the company, but serves as a nice fresh piece of technology to further expand its physical and e-commerce operations and link them together. This could serve as a great source of revenue for the company in the future as it could place FansEdge kiosks inside of some of its physical stores or attempt to partner with a leading retailer to have kiosks in their stores.
With a 52-week high of $3.18 shares appear to be within easy range of that target and forward can push past the $4 range placing the shares close to a double. Shares are trading at 14 times predicted earnings of $0.16 next fiscal year (Yahoo Finance Analysts Estimate). If the company can continue to enjoy dominance in the online market and integrate some of its acquisitions as it has done in the past it will have no problem breaking the $0.16 target. I think shares could earn $0.30, which would place a double share price from here at 17 times predicted future earnings, which seems closer for a small growing company. Look for more announcements of web syndication partners and acquisitions to send shares higher as well. The company’s main competitors are physical retailers like Sports Authority and local small sports memorabilia stores.