What Will Save the Bombay Company?

If you think this company may be undervalued, you would agree with me that the Bombay Company (BBA) would do well with a catalyst: someone who can salvage the company by significantly lowering its costs.

Let’s look at the qualitative profile of this company before plunging into any numbers. The Bombay Company has had quite a good brand image overall, is in an established furniture industry, has managed to survive along with other Furniture-related companies such as Furniture Brands (FBN), Bassett (BSET), La Z Boy (LZB), Ethan Allen (ETH), Acuity (AYI), Chromcraft Revington (CRC), Flexsteel (FLXS), Fortune (FO), Hooker Inds. (HOFT), Leggett Platt (LEG), Natuzzi (NTZ), Sealy (ZZ), Select Comfort (SCSS), Stanley (STLY) and Tempurpedic (TPX). So what’s different about the Bombay Company? Well, a closer look. Financials suggest that their annual revenue has been quite steady in the $500MM+ area since Jan 2006: $536.325 Million as of 3-Feb-07, $536.325 Million as of 20-Apr-06 and $565.074 Million as of 28-Jan-06 (Source: Yahoo Finance). However, a glance at the income statement indicates that the company’s cost of revenue has been significant. Annual cost of revenue itself has been $415.914 Million as of 3-Feb-07, $429.176 Million as of 20-Apr-06, and $429.176 Million as of 28-Jan-06. (Data source: Yahoo Finance).

Okay, so if this scenario could have application for a cost-cutting strategy, can cost cutting resolve the value-trap? The challenge would be in finding specific areas in the company where cost-cutting can be implemented, without hurting the brand image. Fortunately, the Bombay Company’s brand image has been quite strong. Its Market Capital was $19.92 Million (Data source: Yahoo Finance) as of yesterday June 26, 2007. At this price, the company can be purchased at less than 4% of Feb 2007 Annual Sales of $536.325 Million (Data source: Yahoo Finance) and 30% of its May 2007 Book Value of $65.998 Million (Data source: Yahoo Finance). The "Price:Sales" ratio may not be the only valuation metric to address, however, with a relatively steady revenue base in the established furniture industry, catalytic cost reduction could improve fundamentals of the business, and return value to shareholders. In the long run, a focused effort to build brand equity would be necessary for further valuation improvements. The challenge would be in finding specific areas in the company where cost-cutting can be implemented, without hurting the brand image.

I would start by identifying the most significant "non-Brand" sources of cost first and look at ways to cut them.

Disclosure: Author has a long position in BBA

BBA 1-yr chart

Comments

[koreanjohn32:]

Having actually worked at Bombay, albeit a short six months, I can say that the issues are more about a stagnant organization that has grown accustomed to underperforming and a missed consumer focus. Bombay started to ignore it's real customer base, a 60-something woman with fairly conservative taste, and tried to be the next player next to Pottery Barn, which is also doing badly at the moment. It moved quickly, but without really giving too much thought to how it could effectively shift so radically and still maintain growth.

How does one shift market perception about what a company is about? Abercrombie and Fitch moved from being a sort of "Brooks Brothers" men's store into a hip, sexy fashion statement, and like LG (Lucky Goldstar), A&F was able to leverage it's name in a new way. Unfortunately, Bombay Company hasn't been able to do the same. Would it B&C?

Maybe I'm being a bit of a geographical snob, but perhaps high fashion is just not going to emerge from someplace as landlocked as Fort Worth(though they do have some great museum architecture). The cool designers seem to like Los Angeles, or New York. Even so, perhaps the biggest failure that this business model suffers from is that, being a design house, design was never the focus. Rather numbers were, even as the brand image suffered. How does a company like this survive such long-term abuse?

2007 Jul 16 08:51 PM