FTAR.OB -- First Look

Initially looked at the stock in February 2007 for several reasons:
-recently emerged from bankruptcy with no debt and approximately ½ of the market value in cash (before the recently announced speical dividend)
-eps is roughly $2/sh while the stock is trading between $6 - $7 per share (before dividend was paid out)
-originally written up on valueinvestorsclub.com

Currently:
Share Price: $4.60
Market Value $96 million
Enterprise Value: $110 million
Investment Type: Special Situation


Footstar (FTAR) operates footwear departments at lower end stores with the company’s K-Mart business representing over 90% of sales -- if you buy shoes at K-Mart’s serviced by FTAR you are buying them from FTAR not K-Mart. Per the latest 10Q (filed in May 2007 http://www.sec.gov/Archives/edgar/data/1011308/000095012307007054/0000950123-07-007054.txt) the company currently services 1,389 K-Mart stores and 857 Rite-Aid stores. The company also operates a wholesale business which consists of owned brand names (Thom McAn, etc.) and generics which are supplied on a wholesale basis to Wal-Mart and Rite-Aid.

At this point FTAR represents a special situation investment with the likely termination date of 12/2008. As part of the recent re-org (in which FTAR paid out 100% of its debt obligation and did not dilute share count) as part of the bankruptcy re-org, FTAR ended up with 100% of Meldisco (previously a JV with K-Mart) but K-Mart is only required to do business with FTAR until the 12/2008. When the contract runs out, K-Mart can end its relationship with FTAR or renew the contract. If K-Mart ends the relationship it has to buy out all of FTAR’s inventory related to its stores at book value – since K-Mart is 90% of FTAR’s business essentially all its inventory is K-Mart related.

The investment opportunity really hinges on inventory buyout in the K-Mart agreement. Based on present value of the estimated cash flow that FTAR will generate until 12/2008 and the value of the non-K-Mart businesses I believe the stock is worth somewhere between $3.5 – $7.5 (more about my calculations in the next post). However, as an investor in FTAR you also get a free option on FTAR signing new agreement with K-Mart at which point FTAR would no longer trade at liquidation level valuation of 2x-3x cash flow and would be worth somewhere betwee $13 - $22 per share (more about my calculations in the next post).

* 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.