BAMM -- $3 Special Dividend

BAMM announced a one time, $3 per share cash dividend that will be paid out on 7/5/2007. The dividend will cost BAMM approximately $50.4 million.

First of all, where will the cash for the dividend come from? While there was no cash balance released in the filed 8K, based on historical trends BAMM should have roughly $40 million in cash.

Also, due to the release of Harry Potter next month the company maybe experiencing an unusually high number of prepayments. I called the customer service line (1-800-201-3550) and they told me that if I want to pick up the Harry Potter book on the day of the release I can go into the store and get a voucher but I have to pay for it upfront. I am not sure how big of a cash influx this will create but there is certainly some.

Even if the company can pay out the entire $50 million without borrowing, it will have to borrow at some point in 2008 to fund the build up in inventory for the large Q4 selling season. BAMM has plenty of liquidity to fund the dividend as they have a $100 million credit facility which is 100% available to fund operations.

The bigger question is what does this dividend signal about BAMM’s long term prospects?

I think the dividend announcement reinforces the point I made in an earlier post on BAMM. While I still don’t like the valuation and the industry is facing some serious problems, this announcement shows once again that management is focused on generating value for the shareholder -- and I don’t want to bet against them with a short position.

I think the immediate impact of the dividend will be to increase ROE as book value will fall and this company can certainly service a little debt if they have to borrow to fund the dividend.

In the long term I think nothing changes. The company is still posting negative SSS which means that if they want to post any type of top line growth (even to keep up with inflation) they need to keep investing in more stores which will show diminishing returns every year if SSS trends remain negative. And the stock is still not cheap, including Q1 results BAMM is still trading at 15x earnings.


* 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.