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 (NASDAQ:BSET), La Z Boy (NYSE:LZB), Ethan Allen (NYSE:ETH), Acuity (NYSE:AYI), Chromcraft Revington (NYSE:CRC), Flexsteel (NASDAQ:FLXS), Fortune (FO), Hooker Inds. (NASDAQ:HOFT), Leggett Platt (NYSE:LEG), Natuzzi (NYSE:NTZ), Sealy (ZZ), Select Comfort (NASDAQ:SCSS), Stanley (NASDAQ:STLY) and Tempurpedic (NYSE: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