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Jennifer Convertibles - Cashed up, cleaning house & cheap cheap cheap

Would you believe me if I told you, that you could buy the following for less then $4 million:

  1. the owner and licensor of the largest group of sofabed specialty retail stores in the United States,
  2. the largest specialty retailer of leather furniture in the United States,
  3. the licensee of two Ashley Furniture HomeStores, and
  4. $6 million in cash?

No, that is no misprint - you get all that for less then a $4 million market capitalization.

You are still waiting for the catch - aren't you?

Check it out for yourself. The company is Jennifer Convertibles (JEN). I think it would cost more then $4 million to build their brand.

Not surprisingly, they have been hit hard by the recession, but they seem to have a good chance of surviving it. They are closing some unprofitable stores and cleaning up some "related party" issues that should position them well for an up turn in the economy.

Their CEO, Mr. Greenfield, said on Tuesday July 14:

"We are still very optimistic about the future. When either the economy begins to strengthen or our new marketing initiatives take hold, we have positioned ourselves to quickly resume sales momentum with a highly efficient  infrastructure and a very competitive product mix. Our Ashley division continues to grow, producing about 15% of revenues and increased profitability from the second fiscal quarter."

I am a believer, I purchased their shares yesterday for 54 cents each - a significant discount to the 85 cents cash per share they held on May 30th.

Before I close I want to tell you a little about their "cleaning house" and some a related party matters. It seems they purchased inventory from what I understand to be a related party (I am always suspicious of these sorts of arrangements - scared they are skimming off profits for the related parties.). But it seems, in any event, they are unwinding that arrangement. Their July 14 press release said:

"On July 10, 2009, the Company entered into a letter agreement with Caye, the major supplier for the Company, pursuant to which it agreed to pay down its debt to Caye by approximately $400,000 in exchange for Caye releasing their security interest in all of the Company's assets and terminating all obligations under the Credit Facility. In connection with the release, the $1,000,000 that was required to be maintained by the Company in a restricted deposit account is unrestricted and available for operating purposes. In exchange for this release, Caye has provided the Company with $500,000 of trade credit. Neither Caye nor the Company will incur any termination costs or penalties as a result of the termination of the Credit Facility.

During January 2009, the Company began a transition from Caye to the Chinese supplier which currently manufactures approximately 95% of the merchandise ordered through Caye. On April 13, 2009, the terms of this agreement were restated to provide, effective August 1, 2009, vendor terms of 150 days without interest for up to a balance of $10,000,000 in purchases though September 2010. There is no security interest connected with this extension of credit and certain terms will be reviewed October 31, 2009.

Commenting on the changes to the Credit Facility, Mr. Greenfield said, "We are extremely pleased with the terms of this new credit facility. We have been able to release $1,000,000 that had been restricted which now can be used for general corporate purposes, extend the terms for payments, and reduce potential interest expense, all without encumbering our assets. This should provide additional liquidity during this difficult economic period."

There are other related party matters that the company is still involved in that I would like a lot more transparency and preferably unwound:

  1. As at May 30th 2009, they were owed $3.6 million by a related party. Why? When will this be repaid? What security does the company have? How did it come about in the first place?
  2. There are 19 licensed stores owned and operated by a related company on a royalty free basis. Why is the related party not paying a royalty?

Another interesting note from the company's press release was:

"We have retained the investment banking firm of TM Capital Corp. to assist us in the evaluation of our strategic alternatives."

This could indicate that they are looking at ways to increase shareholder value. With the market cap at less then $4 million - I would think one of those alternatives would be to take the company private - especially when a related party already owes the company $3.6 million.

As I said above, after weighing the pros and cons, I decided to buy.

What do you think?

 Disclosure: Long JEN

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