FTAR .OB-- 2Q Earnings Analysis

FTAR announced Q2 earnings today and filed the 8K, actually this company does not announce earnings to any of the major news wires.

Before I dive into the earnings analysis here is what I was looking for when I last posted on the company:

"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."

I would say that the latest quarter was mixed but with more positives than negatives.

Looks like overall sales were down 9% YoY with SSS at Shoemart (these are the K-Mart stores that make up 98% of revenue) down 8% with Rite-Aid reporting a horrific 14.5% decline. Looks like no Shoemart stores were closed in the quarter which is good news. For the first six months total sales are down 5%.

The company blamed weak Easter and poor April sales...blah, blah, blah. When I initially posted on the company I used a 10% sales decline as the "Worst Case Scenario" assumption. If things continue at this trend we may hit that worst case scenario.

However, the rest of the report was nothing but good news.

Gross margin was up 80bps to 35% in the quarter and up 90bps to 33% for the first 6 months. This is tracking ahead of my "Best Case Scenario" assumption of 50bps improvement in GM.

SG&A expense fell more than revenue declined providing 50bps increase in margins for the quarter. For the the first six month SG&G as % of revenue is at 24.7% for a 30bps improvement. This is improvement is more or less in line with my Best Case scenario assumptions.

The margin improvement provided for positive EBITDA growth of 1% to $23.6 negating the 9% sales decline. EBITDA is basically free cash flow for FTAR since it does not pay taxes, have any debt, or CAPEX.

If the company can continue to offset sales declines with margin improvements, I believe my previous target price range of $3.5 - $7.5 per share is still valid and provides substantially more upside than downside at current price levels. As I mentioned before, the free option on the contract extension with K-Mart becomes less valuable with each passing day and I have personally assigned it a zero dollar value at this point.

Again, next quarter I will be watching for the trend in SSS, K-Mart closings, and EBITDA margin improvement.


* 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.