Can Smallcap Investors Continue to Find Value in Russ Berrie?

| About: Kid Brands, (KID)

It’s going to take more than an unexpected bear hug to cage Russ Berrie & Company, Inc. (RUS) -- the venerable maker of collectible plush lions and tigers and bears, oh my -- and other gift items that keep kids of all ages entertained.

Shares of Russ Berrie have risen 35% in the past three months, but can smallcap investors continue to find value if they jump in now?

The stock established the first of a string of 52-week highs on June 6, after the Oakland, N.J., company said that it had received an unsolicited $18-a-share takeover offer that valued the company at about $380 million.

But the Russ Berrie board thought otherwise, and the company said in a statement that the directors had “determined that this proposal undervalues the company.” The company noted that before receiving the bid, it already was looking into the possible sale of its struggling gift division, and had received some interest “from several prospective acquirers.” It also said that it had hired Sagent Advisors to explore its options, which it identified as selling parts of the company, selling the entire company, or making acquisitions to grow, in order to better compete with such giants as Hasbro, Inc. (NASDAQ:HAS) and Mattel, Inc. (NASDAQ:MAT).

The offer did nothing to change the view of analyst Daniel Scalzi of Matrix USA, who has a “strong sell” rating on the company, and he questioned the wisdom of rejecting that price, a tiny premium of about 1.6% of the previous day’s closing share price. He told The Record newspaper in Hackensack, N.J.: “Eighteen bucks a share? They should have taken it.” At Ratings, however, the stock was upgraded from sell to hold.

Shares of Russ Berrie, which were trading below $14 in late March, have remained above that mark since the news came out, rising to the current 52-week high of $19.90 on June 15.

Russ Berrie almost was taken private in 1999, but the deal fell apart when its ordering and delivery system imploded, which it blamed on Y2K difficulties. Since then, it’s been a bit of a stealth company, at least as far as many analysts go, with few actively covering its share performance.

During the past few years, the company has been struggling to cut costs and realign its products. Many small gift shops – the type of retailer that for years was Russ Berrie’s mainstay customer – have lost the battle to big retailers like Wal-Mart Stores, Inc. (NYSE:WMT), Target Corp. (NYSE:TGT) and Toys “R” Us, Inc. Like other suppliers to the bigger retailers, Russ Berrie has to fight for shelf space for its products and then it has to compete with a wider assortment of goods being imported from Asia and other regions.

Back on May 11, Russ Berrie signaled that its turnaround plan might be taking hold, as it reported consolidated net income of $2.5 million, or $0.12 per diluted share, for the quarter ended March 31, compared with a consolidated net loss of $5 million, or a per-share loss of $0.24 for the same period in 2006. Still, net sales for the first quarter declined 2.7% to $75.1 million, despite growth in its infant and juvenile lines. Sales from the gift segment acted as a drag on revenue.

“We now see consumers purchasing more gifts with utilitarian or practical purpose,” Andy Gatto, who has served as president and chief executive officer since 2004, said on a conference call with investors following the release of the financials. “Electronics, such as iPods, cell phones, PDAs, and other forms of electronics, absorb an enormous portion of the consumer gifting dollar. Fun is replacing formality.”

As a result, Gatto said on the conference call that Russ Berrie is fast-tracking product development, noting that 70% of the product line is new for 2007.

Earlier this year, the company branched out with its Shining Stars line, created in partnership with the International Star Registry. The plush toys come with individual codes that provide consumers with access to the Shining Stars Web site.

“Once on the site, children of all ages can register and name a star as well as gain access to a virtual universe that offers customized games, e-cards, and a host of other fun activities,” Gatto explained on the conference call. “Feedback from both retailers and consumers has been incredibly enthusiastic with extremely brisk retail sell-through and millions of hits to the Shining Stars Web site as evidence to this category's potential success.”

Gatto said that Russ Berrie is “winning back customers who had kind of abandoned our company for a number of years, by having a strong product line and having content that they believe they can't live without.”

It does have another possibly lucrative deal lined up for 2008, when it will bring out “Raggedy Ann and Me” toys for United Media.

Just ahead of the revelation of the unsolicited offer, the company announced some changes at the top in late May. The company downsized its board to nine from 12 and named Michael Zimmerman as chairman and Raphael Benaroya as vice chairman. Zimmerman replaced Josh Weston, who retired in January.

“We have focused our business strategy on improving our gift business and continuing to grow our infant and juvenile segment,” Gatto said in a statement that accompanied the May 26 announcement.

Founded in a New Jersey garage in the 1960s by its namesake Russ Berrie, the company rose to fame in the early 1990s by starting a collectible craze with its lineup of loveable troll dolls. Ironically, Russ Berrie died in 2002 on Christmas day - the biggest gift-exchange day of the year.

His legacy lives on, not only through the company, but through a charitable foundation and endowments, primarily at William Patterson University in Wayne, N.J. The university is home to the Russ Berrie Institute for Professional Sales, offering a bachelor’s degree in the subject.

Now the company must sell investors on the concept that the company is worth more than $380 million.

RUS 1-yr chart


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