FTAR.ob -- 3Q Earnings Analysis

FTAR announced Q3 : 2007 earnings last week. Here is the quick breakdown of reported earnings

Q3:2007
Rev $148 (down 3.8%)
GP $44.2 (GM up to 29.9% vs. 29.8% last year)
EBITDA $7.2M (down from $7.7M last year, EBITDA margin down to 4.9% vs. 5% last year)

YTD 2007
Rev $455M (down 6%)
EBITDA $32.9M (up from $30.8M)

When I last wrote about the company I stated that

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

While it looks like the sales decline is slowing, there is still a sales decline with SSS at Shoemart down 1.8% and store closings of 0.4%. While it is disappointing I can’t say that I am entirely surprised taking into account the warm winter and consumer spending problems at the low end shopper.

The big disappointment for me was the decline in EBITDA margin. FTAR has been able to offset the decline in sales with continued operating improvements but it looks like they finally ran out of places to cut cost. Not even the best mangers can keep swimming against the tide of negative sales growth – looks like this is the first quarter where this has caught up with FTAR.

So …..sales are down, store count is down, warm weather means less need for new shoes, FTAR’s customers have less money in their pockets, and cost cuts are not keeping up with sales declines ……WHO CARES?

FTAR is still going to generate somewhere between $15M and $25M in free cash flow in Q4 of 2007 and another $30M - $60M in free cash flow in 2008. It will sell its headquarters for north of $20M and already has $15M in cash. With K-Mart having to buy all its inventory at book value at the end of 2008, FTAR is worth somewhere between $5 per share (worst case scenario which assumes some very bad developments) and $8 per share (best case scenario that is way bullish).

In the following quarter, my expectation is that sales well be down roughly 5%. The thing I will be watching is how badly EBITDA margins get hit. Will they continue to fall or will management continue to work its magic.

* 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.