CPY -- First Look

I initially discovered this company a couple of months ago when doing research on FTAR thinking that if shoe sales can be outsourced by major retailers why not photo studios, electronics departments, optical centers, etc. Unfortunately this company fell into the black hole I call my “watch list” and I forgot about it until I saw it pop up on the daily biggest gainers list as the stock went from roughly $57 to $75 on May 2, 2007.

Initially, I was attracted to the stock for the following reasons:
-operating cash flow on the CF Statement is substantially higher than reported GAAP net income for the last 2 years, despite the lack of large one time charges
-huge swings in CAPEX over the last two years
- dep/amort in 2007 substantially higher than CAPEX
-19% decline in shares outstanding
-solid balance sheet
-appearance of NEGATIVE working capital (is that possible?)

Currently:
Share price: $79
Market Value: $525
Enterprise Value: $536
Investment Type: Turnaround Situation

CPI Corp. (CPY) operates 1,041 professional photo studios in U.S., Canada and Puerto Rico which are located inside Sears stores (actually, 32 stores are free standing but carry the sears name). CPI has been operating photo studios for the last 60 years and has been Sear’s only photo studio operator since 1986.

There are several aspects beyond what is initially evident from the financial statements that are driving the share price. First, the company has gone through a major shake up since 2004. In early 2004, Knightspoint Partners effectively took over the company in a hostile takeover battle and proceeded to replace 6 of the 9 board members, lower the number of board seat to 8, and fire the CEO and his top 2 lieutenants. As a side note, it appears that Knightspoint is a grown up version of Ashton Kutcher. Based on this article from December 2003 it looks like the guy leading the charge was previously a paid advisor to the company when he was and ibanker at CSFB, now this is what I call getting punk’d. http://www.bizjournals.com/stlouis/stories/2003/12/08/story3.html

Second, it appears that professional photo industry in the midst of major upheaval driven by the advent of digital photography. In the last 24 months the company has effectively switched to all digital (there are a few studios in Canada that are still transitioning) which has required a major investment from the company -- more on this later. It also appears that two major tiers have emerged with the bottom of the group competing solely on price and the top of the group competing more on quality, service, and number of choices.

Third, the company announced that it will be acquiring Portrait Corp of America (PCA) out of bankruptcy which operates all the portrait studios located in Wal-Mart stores and up to this point was one of CPY’s biggest competitors. This announcement has major implications for the company that will be discussed in depth in later posts.

To be completely honest, I have done very little analysis up to this point and have basically summarized the major points from the 10K (http://phx.corporate-ir.net/phoenix.zhtml?c=103013&p=irol-sec) . I hope to change this with the next few post …….


* DISCLOSURE: I or accounts I manage may be long or short any and/or all stocks mentioned in this post. This is not a recommendation to buy or sell any security. For informational and educational purposes only.