FTAR.OB -- Final Thoughts

In the previous 4 posts I have outlined the bullish and bearish case for FTAR. As a final thought I will spend some time on short term catalysts that have made the stock even more attractive and have caused me to add to my position recently.

First, management has removed a lot of uncertainty by issuing a special (hopefully not) one time dividend that was paid at the end of April ….oh yeah!, daddy needs a new pair of K-Mart shoes. By the way, if you are looking at financial statements subtract roughly $105M from cash on hand, the small shortfall is going to be financed by the line of credit that will be paid of with this years cash flow.

The biggest concern prior to the special dividend announcement was about management’s intention for the boatload of cash on the books and cash being generated. I think this concern has largely been removed and a liquidation scenario with all cash going to shareholders is a real option. FTAR was trading at $6.5 before the announcement of the dividend and adding back the $5 per share now trades at $9.6 so the dividend payout has removed a lot of overhang and moved the shares by 50%.

Also, the new management team has done and outstanding job streamlining the business which has cause EBITDA margin to increase from 4.5% when the company started trading again to 8.1% over the last 12 months (see Bull case Part I for additional margin discussion http://offthebeatenpathinvestments.blogspot.com/2007/05/bamm-da-bulls-part-i.html

Third, while I don’t want to read into the latest quarter to much since it’s the weakest quarter for the company it looks like the company is continue to improve and at an increased pace. As mentioned in the earlier post, SSS finally have a plus sign in front of them and Rite-Aid SSS were up over 4% with store count up slightly.

Gross Margins were up 130 bps YoY (again, this is huge for a company that had EBITDA margins of 8.1% last year), but keep in mind that the first quarter has the lowest sales and lowest margins so even small changes look big. Also, SG&A expense decline again and SG&A as % of sales improved by 50bps. All in all this was a pretty outstanding quarter, if this company had analyst coverage they would have reported a huge earnings beat.

My last point is more anecdotal but there are some things I have noticed in the 4 months I have owned the stock that put a smile on my face. For example, the annual report I received was on cheap black and white paper stapled together rather than an expensive book – this is good! Another example is that the company just announced a great quarter by any measure and they did not even put out a press release so none of the major alert services picked it up -- just a filling and that’s it. In a case like FTAR where they are going to be holding my cash for a while, these are all things that make me sleep better at night.

Things I will be watching for in the next earnings report are the trend in SSS, trend in K-Mart closings, and Gross and EBITDA margins.

* DISCLOSURE: I or accounts I supervise are long FTAR.OB. This is not a recommendation to buy or sell any security. For informational and educational purposes only.