Knobias' Pick of the Week: Big Dog Holdings (BDOG, GPS, TJX, URBN, FL, GCO, PSS)

by: Microcap Speculator

The Microcap Speculator submits: Knobias' SPOT stock of the week this week is Big Dog Holdings (ticker: BDOG). Over the years I have played this stock from both the long and short side. At the moment, I don't find either side too compelling but here is the article -- judge for yourself:

Big Dog Holdings, Inc. (nasdaq NM: BDOG) develops, markets and retails a branded, lifestyle collection of unique, high-quality, popular-priced consumer products, including activewear, casual sportswear, footwear, accessories and gifts. BDOG operates two business segments: (1) Big Dog Sportswear is a specialty retailer of branded activewear and accessories via 181 retail stores, wholesale and corporate sales, and catalog and internet business. For 9-months, Big Dog contributed 52% of revenues; 63% of net income; and, 48% of total assets. (2) The Walking Company [TWC] is a specialty retailer of shoes and accessories via 87 retail stores. For 9-months, TWC contributed 48% of revenues; 37% of net income; and, 52% of total assets. BDOG's retail stores are located primarily in leading retail malls and tourist areas.

The BULLS Say...

Christmas Came Early: The day after Thanksgiving is historically one of the busiest retail shopping days of the year and is often referred to as "Black Friday". It's this day that many retailers exit the "red" and begin realizing profits for the year. After years of this same pattern, "Black Friday" came early for BDOG. Despite a difficult hurricane season, BDOG posted $0.10/shr in net diluted earnings for the first 9-months of 2005. This compares to losses of ($0.09)/shr and ($0.02)/shr for 2004 and 2003 respectively. An 11.8% jump in sales for the first 9-months may foreshadow good tidings for this Christmas Q4. The company is on pace to see record sales of $175-180M and possible record earnings of $0.55-0.65/shr, thanks to the acquisition of Footworks in Q3. Numbers like these would produce low double digit P/E ratios at current trading levels...Not bad relative to peers.

Time to Get Off the Porch: So how does BDOG match up against the "Big Dogs" in retail? When compared to footwear peers (FL, GCO, PSS) and apparel peers (GPS, TJX, URBN), BDOG is lagging in several valuation areas, including: Price/Sales, Price/Earnings and Price/Book. Although BDOG's sales growth is not at the very top of the group, it has been steady and solid for this small-cap niche retailer. BDOG's gross margin really tops the list and appears to be growing. Relative net margins are a bit disappointing, but bottom-line growth should have BDOG running at the front of the pack. So, why is this stock on the porch and not running with the Big Dogs?

The Kayne Brothers...Pick of the Litter: Between the reporting of Q2 and Q3, BDOG Chairman and Founder, Fred Kayne, boosted his stake to 58.5% by purchasing an additional 845,832 shares with personal funds on 08/23/05. Fred Kayne has over 40 years of top-level experience in finance, investment banking, real estate, brokerage and retailing. A graduate of MIT, Fred Kayne has been a founder or director with First Los Angeles Bank, Bear Stearns, Terravant Land Co, FarWest Financial, Fortune Financial, Fortune Fashions Industries, Fortune Casuals, Fortune Swimwear, Paige Premium Denim, FAO, Inc., among others. Fred's brother, Richard A. Kayne, also sports an impressive pedigree. Richard Kayne is an investor in BDOG via Kayne Anderson Capital Advisors, an investment firm founded by Ric Kayne, that manages approx $4.8B in alternative assets. If you're looking for a company with leadership that knows a thing or two about shareholder value, look no further.

The BEARS Say...

Break Out or Break Down? Solid financial performance has propelled BDOG into an extended, near 3-year, uptrend. For the past year, BDOG has been range-bound between $6.00-7.50, only touching the $7.50 area 3 times. The stock seems poised to breakout to levels not seen since 1999, but has a tendency to struggle right here. Any negative chatter or gloomy forecasting about the holiday season may slow any attempts for this thinly traded stock to mount a charge.

Have a Holly, Jolly Christmas: As with every retailer, Christmas is everything. BDOG has sales momentum exiting Q3, but holiday shopping and the consumer’s purse strings may decide whether BDOG runs or remains on the porch. On November 22nd, the National Retail Federation [NRF] raised its holiday sales forecast from a 5% growth rate to 6%. This is the first time the NRF has ever raised its forecast during the holiday season. Falling gas prices helped improve their expectations, but 6% is still below last year's 6.7% holiday sales growth rate. If BDOG can match Q4-2004, the company should still report record annual sales. Any increase would be a positive, of course, but a shortfall would be a major disappointment that could send the stock back to 2004 levels.

DISCLOSURE: I have no position in BDOG. Not a recommendation to buy or sell any security. For informational and educational purposes only.